Head to Head: Ethanol Assessment

March 30, 2016 02:56 AM
Head to Head: Ethanol Assessment

Q: Corn used for ethanol production has been one of the bright spots of the U.S. corn balance sheet, though ethanol stocks remain at or near record highs. What do you see as the key to drawing down ethanol stocks, and do you see this as being a real problem for ethanol production moving forward? Additionally, please provide us with your price outlook for grains over the next 45 to 60 days.

   Kevin Duling 
   Founder, KD Investors

Energy Prices Tell Global Economic Story

Energy prices can be the gauge of the world economy. I think that is the case now. Time and low prices will remedy record ethanol stocks. 

I have been pleasantly surprised with ethanol production in the past seven months, as we continually have exceeded 2014-15 levels. What amazes me is the World Agricultural Supply and Demand Estimates (WASDE) for coarse grain usage. For 2015-16, WASDE estimates usage at -0.5%. Given the five-year average is close to a positive 3%, and in light of current livestock numbers along with low grain prices, that value is hard to accept. 

Globally, 50% of the world corn carryout is in China. Some think these stocks are unfit for animal consumption. If we add the 1.3-billion-bushel net short position by hedge funds, what happens to ethanol production should corn gain $1.25 and crude oil stay below $40?

If grain makes a run, and I believe it will make a significant run driven by wheat imports to India, I expect ethanol production to contract—but not immediately. For now, key factors holding the ball are India, the weather, record-short hedge funds and mysterious China stocks. 

Contact Kevin at kdinvestors@gmail.com

   Peter Meyer 
       Senior director of agricultural           commodities, PIRA Energy        Group

Ethanol Exports Needed, Planting Pressure Ahead

Advances in production and fuel efficiency represent significant headwinds to drawing down ethanol stocks from record levels. Ethanol traded at a sizable premium to gasoline this past winter, but plants ran at full capacity in order to maintain a high efficiency rating.

Even with the summer driving season upon us, the patriotism of using U.S.-grown fuel must be complemented with a concerted effort to improve exports in order to reduce stocks. A Renewable Fuel Standard (RFS) that extends through the blend wall does nothing but line the pockets of RIN traders while E-15 and higher blends struggle to gain a foothold. Funds spent on lobbying EPA to raise RFS requirements would reap much larger dividends if used to expand the global market for U.S. ethanol. Feed the world, fuel the world.

Extremely low option volatility for nearby futures contracts suggests very little price movement for the next month or two. While a major sell-off is always possible, current short positioning by speculators and a hand-to-mouth approach by end users should offer continued support near recent lows.

Contact Peter at pmeyer@pira.com

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