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Ethanol’s Discount to Gasoline Expands on Outlook for Ample Corn

August 20, 2013
ethanol pump
Ethanol for September delivery is trading at a 31.6-cent premium to the October contract, a phenomenon known as backwardation, where prompt prices are higher than later ones.  

Aug. 20 (Bloomberg) -- Ethanol’s discount to gasoline expanded the first time in a week on speculation that next month’s corn harvest will yield ample supply of the biofuel feedstock and reduce costs for producers.

The spread, or price difference, widened 2.75 cents to 71.18 cents a gallon at 12:03 p.m. New York time, as participants in the annual Professional Farmers of America Midwest crop tour estimated higher yields in corn-producing states such as South Dakota and Ohio after inspecting fields. One bushel of corn makes at least 2.75 gallons of ethanol.

"Medium to long-term, it looks like there will be plenty of corn," said Justin Dirico, manager of the biofuels desk at Eagle Energy Brokers LLC in New York.

Denatured ethanol for September delivery fell 1.3 cents to $2.236 a gallon on the Chicago Board of Trade. Futures have gained 2.1 percent this year.

Gasoline for September delivery rose 1.45 cents to $2.9478 a gallon on the New York Mercantile Exchange. The contract covers reformulated gasoline, made to be blended with ethanol before delivery to filling stations.

Corn for September delivery slumped 6.25 cents, or 1.3 percent, to $4.87 a bushel in Chicago. The more actively traded December contract dropped 6.75 cents to $4.7875.

The corn crush spread, or the cost difference between a gallon of ethanol and the corn needed to make it, based on September contracts, was 47 cents, up from 46 cents yesterday, data compiled by Bloomberg show.

 

Ethanol Backwardation

 

Ethanol for September delivery is trading at a 31.6-cent premium to the October contract, a phenomenon known as backwardation, where prompt prices are higher than later ones.

Farmers responded to last summer’s drought that devastated yields by sowing the most acres of corn since 1936.

"This may lead to record ethanol production, with lower corn prices potentially boosting margins if ethanol prices remain firm," Bloomberg Industries wrote in a note today.

The government uses tracking certificates, known as Renewable Identification Numbers, or RINs, to determine compliance with mandates to use the fuel.

Corn-based ethanol RINs slipped 1 cent to 79 cents, while advanced RINs, which cover biodiesel and Brazilian sugarcane- based ethanol, were unchanged at 89 cents, data compiled by Bloomberg show.

 

--With assistance from Tony C. Dreibus in Chicago. Editors: Bill Banker, Richard Stubbe

 

To contact the reporter on this story: Mario Parker in Chicago at mparker22@bloomberg.net

 

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

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