US corn price surge stokes fear of new ethanol crisis

06 April 2011 23:13  [Source: ICIS news]

High corn threatens ethanolHOUSTON (ICIS)--The latest surge in the US corn market could trigger a repeat of the 2008 crisis, when several US ethanol plants went belly-up because of negative margins caused by high production costs, sources said on Wednesday.

The dire projection came after corn prices rallied by more than 15% in recent days, following news of a large drop in corn stocks reported by a US Department of Agriculture (USDA) report on 31 March.

US corn stocks were at 6.52bn bushels in early March, falling by 15% from a year earlier, according to government figures.

The USDA said that, of total stocks, 3.38bn bushels of corn were stored on farms, which is down 26% from a year earlier.

Off-farm stocks, at 3.14bn bushels, were down slightly from a year ago, the government said.

Indicated stock disappearance in December-February 2011 stood at 3.53bn bushels, compared with 3.21bn bushels during the same period last year, the USDA said.

Market reaction to the USDA figures was swift, as corn rallied by more than 70 cents/bushel in the two days after the report was released.

The front-month corn contract ended on Wednesday at $7.62/bushel, rising by just over a dollar from $6.61/bushel a week earlier.

The surge in the price of the feedstock lifted ethanol prices but not enough to preserve margins, a source said, adding that the ethanol-to-corn crush spread nearly evaporated in a matter of days.

“The crush spread got crushed… not good for ethanol producers,” another source said.

The front-month ethanol contract in Chicago closed on Wednesday at $2.70/gal, up from $2.47/gal a week earlier.

Margins dropped to around 3 cents/gal from 15 cents/gal only days ago, a trader said.

The rapid rise in corn prices, if sustained, could put some plants out of business in a repeat of the 2008 crisis, market sources said.

The first casualty emerged this week after ethanol producer Clean Burn Fuels filed for Chapter 11, saying it had to seek bankruptcy protection because ethanol prices were not keeping up with rising corn prices.

The company said it expects to emerge from bankruptcy later this year.

Clean Burn Fuels has an ethanol plant in Raeford, North Carolina. The facility can produce 60m gal/year (227m litres/year), expandable to 220m gal/year.

The company had its first full month of production in October 2010, but suspended production in early March because of high corn costs and weak ethanol prices.

The situation on the industrial ethanol market was also dire for US buyers, which in April were expected to absorb their third consecutive quarterly contract increase because of higher corn prices.

US industrial ethanol contract prices were expected to rise by as much as 12% this month, as producers were pushing for an increase of 40 cents/gal.

Market sources said most of the proposed increase was going through.

Industrial ethanol contracts in January were assessed at $3.25-3.50/gal for 190-proof, and at $3.50-3.65/gal for 200-proof grade, rising by 30 cents/gal from October as a result of higher corn prices.

The increase in January followed a 10–15 cent/gal hike in October 2010, which was also driven by higher corn prices.

Talk emerged this week that US producers could be aiming for another 40 cent/gal increase in July if corn prices remain at current levels.

($1 = €0.70)

For more on ethanol visit ICIS chemical intelligence

By: William Lemos
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