FocusUS ethanol players unsure if price hikes will spur demand

12 July 2012 18:16  [Source: ICIS news]

HOUSTON (ICIS)--A recent report by the US Department of Agriculture on Wednesday, combined with a draw from domestic stockpiles and the recent halt in production at two ethanol plants has pushed fuel ethanol prices and corn prices higher this week. However, ethanol trade participants are uncertain if these recent events will spur more activity in the market, or demand for that matter.

Trading activity in the US ethanol market has slowed down since the start of the year, causing some ethanol trade participants, specifically brokers to move to other more active commodity segments.

Some have attributed the drop in activity to the end of the volumentric ethanol excise tax credit (VEETC) and tariff at the close of 2011.

“I’m not really sure if this will spur activity and demand,” said a US ethanol trade source referring to the recent USDA report and production cuts. “That's definitely the question on everyone's minds though. A lot of people are talking about the imports from Brazil holding back the effects of the production cuts.

The USDA on Wednesday trimmed its projected yield of the 2012 US corn crop by 12% to a national average of 146 bushels/acre in its monthly World Agriculture Supply and Demand Estimates (WASDE), down 20 bushels/acre from the June estimate.

Wide-spread drought across the midwest, central plains and midsouth continues to punish crops, prompting some farmers in states such as Iowa, Illinois and Indiana to cut down their corn crop and collect crop insurance, which can pay as much as 80% of a crop's projected value depending on the policy.

USDA now projects a harvest of 12.97bn bushels, 12% less than a month ago, but still the third largest on record.

Valero has also temporarily suspended production at its 120m gal/year (454m litre/year) Linden ethanol plant in Indiana for economic reasons.

The company said this was similar to the way it temporarily idled its 120m gal/year plant in Albion, Nebraska, a week earlier.

Fuel ethanol prices on Wednesday reacted by moving higher compared with a week earlier.

In the fuel ethanol spot market, Chicago prices on Wednesday were at $2.40-2.45/gal, up from $2.30-2.34/gal a week earlier.

New York Harbor (NYH) ethanol prices were at $2.50-2.55/gal, above prices from the previous Wednesay at $2.40-4.44/gal.

In southern California, spot prices were at $2.65-2.70/gal, also up from $2.40-2.44/gal the previous week.

Corn futures on Wednesday settled at $7.506/bushel, up from $6.116/bushel a month earlier.

However, ethanol trade sources have not said if the increase in prices will push demand.

“You may see corn drop like a rock,” said an ethanol trade source. “But any sign of some good news on crops, you better watch out.”

($1 = €0.82)

By: Brian Balboa
+1 713 525 2653

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