US ethanol production, stocks fall, but feed demand drives margins

Both US ethanol production and stock levels have fallen marginally to 1.089 million barrels per day and 22.4 million barrels respectively, the US EIA data for the week ending December 8 shows Wednesday.

A fall in production was not unexpected after US producers established a new production record in the week through to December 1, topping the 1.1 million b/d level for the first time.

But with stocks building and six months out from driving season, there were concerns that the complex could sustain such levels – potentially bringing further pressure to ethanol margins and ultimately US corn prices.

However, healthy demand for co-products, such as dried distillers grains, has provided some support to production margins and fended off the need to cut runs.

“What’s keeping them going right now is that the co-product value is really high… it’s 115% the value of corn,” one market source said.

Margin data from the Iowa State University put the average return over operating cost at 12 cents/gal as of December 8 – down from 17 cents/gal at the beginning of December, compared to around 40 cents/gal through the August peak driving period.

Heading into 2018, the first quarter of the year traditionally sees margins face pressure as the post-corn harvest sees corn availability rise, while driving demand can tail off and the ISU data shows margins turning negative in January 2017.

“If we start seeing January, February and March turn negative, then there will be some leveraged plants slowing down,” the source said, adding “cheap ethanol should bring in some blending demand.”

Ethanol futures prices touched a 12-year low Monday as the pressure tells on ethanol markets. According to the CME, the front month January futures contract is trading around $1.292/gal Tuesday, down from the Monday settle value at $1.295/gal.