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The drought drumbeat

It is difficult to contribute thoughtful information regarding the markets when it is clear that the weather forecast is the most important thing on everyone’s mind. Plus, for farmers, the uncertainties of yield and production make it hard to concentrate on market information.  The only thing that really grabs someone’s attention is the latest yield and/or price forecast!

This week there has been a lot of discussion about a clearly fundamental topic-ethanol production. This basic discussion starts with the current high price of corn. Then, add in the plunging weekly ethanol production numbers (released every Wednesday at 9:30 a.m. CT). High priced corn, in theory, should make ethanol production unprofitable and cause a slowdown. And in the short-term, it has.

Does this last?

It could last simply because there are currently excess RIN’s that can be used by an obligated party instead of blending ethanol into gasoline. If a company does not have an adequate supply of RIN’s, they can purchase them and use them instead of blending. This means ethanol production could stay at these reduced levels or go lower.

The price of DDG’s influences the profitability calculation and the sharply higher DDG prices have helped an ethanol plant’s financial situation.  Certainly, the price of a similar product, soybean meal, is very strong. DDG’s, with their high protein content, can substitute for meal, so it makes sense the prices rally together. This is somewhat caused by the drought market, but it also reflects elements of a demand market. Demand for protein has been very strong and has not slowed in the face of rising prices.

The price of the finished product, ethanol, can also be strong enough to keep ethanol producers in the black. Why would this happen? A general rally in energy prices or a specific rally in ethanol prices. Both are possible. But why would there be a rally solely in ethanol prices?  This could happen because the blenders need to use ethanol to bring the gasoline up to the correct specifications—octane rating, for example. Instead of refining gas to higher specifications, ethanol is used to improve the quality of the finished product. Will refiners upgrade their processes?    

The balancing act, it turns out, could be more complicated than first thought.

The risk of loss in trading commodities can be substantial.  You should therefore carefully consider whether such trading is suitable for you in light of your financial situation.

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