Surprise! Ethanol Demand is Above Last Year To-Date, Even as Gasoline Demand Flounders
Unfortunately for the industry however, profit margins have not followed the demand trend, and therein lay the challenge for ethanol producers in 2012.
Since the first of the year, we calculate that producer margins, as of March 14, 2012 are down 85.7 percent from the final day of 2011.
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As traders told me this week, it's not surprising given where gasoline prices are these days, and the fact that there is no blenders credit, has not impacted discretionary demand as many had predicted. I must confess, I thought it would have some impact, but apparently it has not.
We could also draw another conclusionexpiration of the VEETC has not really impacted producer margins. Producer margins have been impacted by the simple fact that expiration of the blenders credit dictated that ethanol prices had to fall in order to sustain demand, and fall they did.
Since the beginning of the year, March corn (through March 14) has gained just 8.6 percent, while prompt ethanol futures gained 7.1 percent. But, the real plunge in profits came in mid-December after expiration of the December ethanol futures contract, and the problem for ethanol producers has been in the physical market, where corn has been tight and expensive since November.
So where do we go from here?
I expect that ethanol consumption will continue to compare favorably to last year, as long as export demand continues. This is not a definite as Brazilian demand will surely decline as their new harvest begins next month.
I believe blending demand will remain at optimum levels, and hopefully we begin to see E15 enter the market. Gasoline demand will continue to flounder until the driving season because there is no sign that speculators will abandon the product before it's typical pre-spring surge has run it's course. However, I also believe that if nothing happens with Iran militarily before Memorial Day, we will see oil prices begin to slide, including gasoline. Investors will not try to pick the top of this market, especially after what happened in 2009, when the market collapsed after it became abundantly clear that there was glut of oil things petroleum.
There are already some subtle signs that gasoline might be running out of gas (pardon the pun).
Traders tell us that in the last couple of weeks, that despite surging gasoline futures, cracks are beginning to surface in cash markets, where values are beginning to hit resistance across many physical marketsusually the first sign that prices may have risen too high too fast, but it's still early in the spring buildup, and other traders said that gasoline almost certainly will move higher regardless of what demand does.
Ethanol blending will remain at high levels as long as the spread between gasoline and ethanol are sustained near recent levels which are currently above $1.00 per gallon, when futures are compared. This also means that international demand for anything that's not gasoline will remain brisk.
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Posted in Business Service Post Date 04/05/2016