US ethanol production reaches record 603 million gallons per month; spread between gasoline, corn prices not enough to forestall ethanol glut

The US Energy Information Administration released a report saying that US daily ethanol output reached a record 603 million gallons in November, up from 579 million in October. Plant capacity utilization increased to 104.7 percent due to price increases, while US ethanol reserves fell to 470 million gallons. Overall production capacity for the industry increased to 7.9 billion gallons.

Pavel Molchanov, analyst with Raymond James, commented “Driven by last fall’s rapid increase in ethanol supply that blending infrastructure had difficulty absorbing, the spread between ethanol and gasoline reached an all-time low of a $0.60/gallon discount in early November 2007.  Since that time, ethanol prices have steadily climbed 30% higher, while gasoline prices have traded relatively flat.  In fact, ethanol is now trading at an $0.11/gallon premium to gasoline – the first time it has garnered a premium in over five months.”

“$5+ per bushel corn prices continue to present serious challenges for ethanol producers and in fact have emerged over the past two months as arguably the biggest drag on the industry’s profitability,” Molchanov added. “On the positive side, ethanol prices have returned to parity with gasoline sooner than we had previously anticipated, and the outlook for ethanol demand is enhanced by the updated RFS.  Driven by constrained refining capacity and ethanol’s intrinsic advantages – as an octane enhancer, clean air additive, and valuable blend component – we project consistent growth in ethanol demand. Despite the renewed strength in ethanol prices, however, under the current corn price environment – which spiked to 11-year highs in January following two separate U.S. Department of Agriculture reports – the outlook for the crush spread and hence ethanol company profitability looks truly bleak, at least for the next 18-24 months.”
The EIA stirred controversy last month when they released long-term fuel demand projections that the US will derive 83 percent of its energy needs from fossil fuels, down only 3 points from the 86 percent figure for 2006. The EIA, which projected in its study that biofuel consumption would increase to 17 billion gallons by 2030, may have to revise its figures in the light of the passage of the Energy Bill. The Bill mandates that 36 billion gallons of biofuel fuel consumption by 2022, or more than 25 percent of total fuel use based on 2006 consumption.

The EISA Act calls for 9 billion gallons of ethanol to be blended in calendar 2008. It is not expected that the spread between gasoline prices and the cost of ethanol, based on corn futures possibly reaching all-time records this spring, will encourage discretionary blending above the 9 billion mandate. With expect uS capacity increasing to 13.3 billion gallons in 2008, there could be significant overcapacity in the system unless the spread between gasoline prices and ethanol prices encourages more discretionary blending.

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