Market and product

An ethanol rally stalled despite what appeared a green light to bulls from supply data, which showed stocks tumbling to their lowest in more than a year, despite a return in production close to record highs.

US ethanol inventories fell by 620,000 barrels last week, equivalent to 3.2%, to 18.62m barrels – the lowest since October last year, according to data from the Energy Information Administration.

The decline, which took stocks more than 20% below their record high set in March, came despite a strong week for production, which rose by 15,000 barrels a day last week to 1.02m barrels a day, coming just 12,000 barrels a day short of the record top.

However, while the initial reaction was to send ethanol futures sharply higher, the rally quickly faded to leave Chicago's January contract at $1.458 a gallon in late deals, a drop of 0.8% on the day.

Seasonal factor

The retreat reflected scepticism that the shrinkage in US ethanol stocks can last, said Jerrod Kitt, at Chicago broker Linn Group.

While the summer driving season represents the high profile period for demand, inventories often tend to bottom out later in the year, in October and November, with "strong usage in the run up to Thanksgiving", he told Agrimoney.com.

"Come December, and cold temperatures, that's when people aren't going to drive as much."

The expectation of a stocks rebuild as the late-year demand slip kicks in is "probably why the market has reacted the way it has".

'Arb is still open'

Certainly, production margins continue to support healthy output levels, with ethanol plants enjoying "the most consistent period of profitability we have seen in some time", Mr Kitt said.

"Margins have been $0.15-0.30 a gallon since April," with operators which bought corn – the key raw material for bioethanol output - from farmers during the summer low in prices, seeing much higher profitability.

However, on the demand side, he also flagged buoyant US ethanol exports, with latest data, for September, showing the strongest pace of shipments since December 2011.

"We are seeing lot of evidence that US ethanol is the cheapest product on the world market," he said, with shipments proving strong even to Brazil, a major ethanol producer itself, but where high sugar prices have incentivised mills to turn cane into sugar rather than biofuel.

"The arb is still open" for selling ethanol to Brazil.

China and India have also been strong, if inconsistent buyers, with Canada "taking up their purchases", and buying approaching 23m gallons, compared with rates of 15m-16m gallons a month last year. - Agrimoney