Bloomberg News

Ethanol Declines as Production Cuts Not Enough to Trim Supply

July 20, 2012

Ethanol futures in Chicago fell for a second day on speculation that supplies of the fuel are ample to meet demand even as producers trim output because of high corn prices brought on by drought.

The biofuel fell two days after an Energy Department report that inventories climbed last week to 19.6 million barrels, 2.1 percent above a year earlier. Producers have responded to estimates of a smaller corn crop and higher manufacturing costs by cutting output to the lowest level in more than two years.

“The ethanol market is still relatively well-supplied,” said Michael Breitenbach, an analyst and trader at Blue Ocean Brokerage LLC in New York.

Denatured ethanol for August delivery fell 1.3 cents, or 0.5 percent, to settle at $2.705 a gallon on the Chicago Board of Trade. Prices are up 23 percent so far this year and gained 5.8 percent for a fifth weekly advance, the longest streak since March 16.

In cash market trading, ethanol was unchanged in New York at $2.82 a gallon, in Chicago at $2.68, in the U.S. Gulf at $2.74 and on the West Coast at $2.92 a gallon, according to data compiled by Bloomberg.

Corn for December delivery advanced 17.25 cents, or 2.2 percent, to $7.9575 a bushel in Chicago. One bushel makes at least 2.75 gallons of ethanol.

Distillers are losing about 34 cents on each gallon of the biofuel made, based on September contracts for corn and ethanol, according to data compiled by Bloomberg, and 34 cents based on the December contracts after the corn harvest. Corn is the primary ingredient in U.S.-made ethanol, and an estimated 78 percent of the U.S. crop is affected by drought.

“The corn crop is in serious trouble,” Breitenbach said. “We can expect this combination to put pressure on ethanol margins until production and inventories adjust to economic conditions.”

To contact the reporter on this story: Mario Parker in Chicago at mparker22@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net


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