Ethanol Production Rises On Strong Margins

December 12, 2013 12:21 AM

What Traders are Talking About:

Overnight highlights: As of 6:15 a.m. CT, corn futures are trading 1 to 2 cents lower, soybeans are mostly 3 to 7 cents lower and wheat futures are mixed with SRW mildly weaker and HRS mildly firmer. Weekly export sales will very likely set the price tone for the start of daytime trading. Cattle futures are expected to open with a slightly weaker tone as traders await cash cattle trade, while hogs are seen opening midly firmer on short-covering.


* Ethanol production rises amid strong margins. Ethanol production for the week ended Dec. 6 rose 31,000 barrels per day (bpd) to 944,000 bpd -- the highest output figure since January 2012. The four-week average for ethanol production stood at 922,000 bpd for an annualized rate of 14.13 billion gallons. Expressed as a percentage of daily gasoline demand, daily ethanol production was 11.31% -- the highest rate since February 2012. While the government is considering a reduction to the Renewable Fuel Standard (RFS) mandate, ethanol output is building amid very strong margins -- record per-unit profits in some cases. Those margins vary widely, but most Midwest ethanol plants are currently making up to $1 per gallon. Sales of ethanol to blenders is covering the cost of corn, while sales of DDGs are providing the profits.

The long and short of it: Market participants are concerned corn-for-ethanol demand will wane if the RFS is reduced, but margins will determine how much ethanol processors will produce. The mandate is the floor, not the ceiling. At current price levels (or lower) there is incentive for plants to keep cranking out ethanol production.

* Beans vs. corn and wheat. Soybean futures have been strong the past couple weeks, moving to the top of the broad fall trading range and hinting at an upside breakout from that range. Meanwhile, corn and wheat futures are struggling to put in lows. The divergence in price direction is unlikely to last for an extended period. Therefore, this is turning into a situation of soybeans versus corn and wheat. Will soybeans be strong enough to pull the corn and wheat markets higher or will pressure from corn and wheat weigh on soybeans?

The long and short of it: While macro-economics are gradually strengthening, the current environment is not one that's overly supportive of aggressive speculative investment in commodities. That would suggest soybeans will struggle to pull corn and wheat higher -- unless there's a bullish catalyst for the corn and wheat markets.

* Attitude shift in hogs. Seasonally, hog supplies should be peaking. Market-ready hog numbers typically start to gradually decline by the start of the new year. While the seasonal decline in hog numbers will happen again this year, record hog weights will mute the initial easing of market-ready supplies. Average Iowa/southern Minnesota hog weights rose another 0.7 lb. the week ended Dec. 7 to a record 282.4 pounds. Hog traders are taking note of the heavy carcass weight's impact on supplies. In fact, recent price action suggests traders have moved from looking to buy breaks to looking for reasons to sell.

The long and short of it: Until there's another shift in attitudes in the hog market, futures will struggle to put in a seasonal low.


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