US ethanol producers are treading water right now with razor-thin margins brought on by low prices, but if historical trends hold up, things could get even uglier in September.
Bullish September WASDE numbers showing trouble ahead for the corn crop estimates sent corn futures and ethanol prices into a rally in the middle of the month, but if it holds, it’d be the first time in five years that prices strengthen in September.
The typically volatile Platts Chicago Argo benchmark ethanol assessment has been locked in a tight 10-cent range for nearly two months, hovering at a shockingly comfortable level around $1.50/gal.
But how much longer can this complacency last?
If this September plays out anything like the last four Septembers have, prices will soon be packing their bags and heading south for the fall.
In 2014, the Argo price tumbled from $2.26/gal on the last day of August to $1.59/gal on the last day of September, a 29.65% decline. Similarly in 2013, the price fell 16.48% across the same period, going from $2.67/gal to $2.23/gal. In 2012, we went from $2.56/gal to $2.35/gal (8.21% decline), and in 2011, the drop was 14.78% ($2.91/gal to $2.48/gal).
For the most part, the falling prices were driven by a September seasonal decline in corn prices. Last year, front-month corn futures on the Chicago Board of Trade tumbled from $3.59/bushel to $3.20/bushel, a 10.86% decline. Corn fell 10.81% in 2013, 6.84% in 2012 and 21.79% in 2011.
While the rates of decline weren’t in perfect correlation, there were some obvious parallels — if corn goes down a little bit, ethanol will go down a little bit. If corn goes down a lot, ethanol will go down a lot.
Across the last four years, the average percentage decline of the Argo assessment in September has been 17.28%, alongside a 12.58% drop in nearby corn futures in that same time frame.
With producers already in a tight situation, exports flowing out and ethanol-into-gasoline blending rates at historically strong levels, it is highly unlikely that we will see a 17.28% decline in Argo prices by the end of this September. That type of decline from the August 31 assessment of $1.45/gal would put us south of $1.20/gal, a level not seen since June 2005.
Granted, we fell below $1.30/gal for the first time in nearly a decade earlier this year in January, but an event of that magnitude appears unlikely at this point, especially with corn going on a mini rally to open up September.
Another bearish factor to consider, however, is the fact that we made it through the summer driving season with ethanol stockpiles at their healthiest August levels ever. Stockpiles averaged 18.68 million barrels in August, far below three-year highs of 21.58 million barrels hit in February, but still extremely healthy for this time of the year. Stocks were nearly 1 million barrels stronger than 2014 and 2 million barrels above 2013 August levels.
Most of that strength of supply was aided by record production rates of 957,000 barrels per day in August, sharply higher than the 2014 rate of 921,000 b/d in 2014, 838,000 b/d in 2013 and 821,000 b/d in 2012.
In conclusion, unless the firm corn rally holds the market ransom in the coming weeks (which it very well could), ethanol prices have only one direction to go in September. It’s just a matter of how deep those cuts will go.