The stage is set for a dramatic reaction to reduced acreage estimates in grains as USDA stays away from anything that hints at deflation. Farm income comparisons help with that as does a look at acreage that was unharvested or prevent plant acres.
Those numbers were on the low end of the 10 year scale last year. Their fist slide in their presentation in their annual outlook features commodity prices declining in real prices over the last 60 years. Does that sound like a bullish promotion to you?
But focus on energy prices and ethanol will start to be more of an everyday event as crude tries to carve out a trading range or makes new lows or rebounds, at least one of the above. But importantly, this market watch just shows how important basic energy costs are to so many businesses in this country so we are on point. More and more negative vibes may start to surface about energy demand and supplies as the excuse, deflation, permeates traders minds. One key might be the relationship of ethanol to unleaded gas. Ethanol has been gaining significantly on RBOB in the marketplace – a key indicator? Quite possibly.
The ethanol industry is leaning toward a small reduction in production in the week’s ahead and also see blender demand steady to slightly easier wk/wk thanks to the weather, with implied disappearance also holding steady or slightly below last week’s elevated levels. Most estimates would result in a 1.5% wk/wk stocks build, which would put aggregate US inventories within striking distance of 900 mil gal – a new high dating back to May 2012, if correct.
Attendance at the current ethanol industry convention is strong and one friend made the comment that the initial mood seemed “mixed to dreary”, despite the Texas sun and balmy weather compared to the frigid Midwest. Sentiment is not too difficult to understand; while the ethanol industry is coming off its most profitable two year stretch in modern history, spot margins have soured since the start of 2015, and the inventory overhang that developed is promoting a more pessimistic (realistic?) view on fundamentals looking forward. This week’s API report hinted at a massive petroleum build on top of already burgeoning stocks – +14.3 million on crude oil, +1.3 mil on gasoline, and -2.7 million on distillate. Holding last week’s low in Crude Oil may be key to confirming recent stabilization in that market.
Mar Ethanol vs. RBOB – in futures trade, ethanol & gasoline have transitioned back to a more normal relationship, with ethanol trading at a discount to gasoline, particularly in spring months. In physical spot markets, the relationship is a lot closer to parity. Additional discretionary fuel (and ethanol blender) usage is probable on a year-over-year basis given sharply lower retail gasoline prices. Ethanol features value both as an octane source, as well as the obvious energy component. RFS uncertainty should also stimulate near-maximum E-10 blending until resolved, regardless of blending margins.
Q2 Ethanol Profitability – forward crush spreads continue to linger near breakeven. Spot cash margins vary widely – some losing 10 c/gal, others making 10 c/gal, with high relative DDG prices offering support, particularly in the latter case. There are likely more plants losing money than making money today? The Q2 strip is shown below just above breakeven, assuming DDG’s priced at 120% of corn and option price corn. Feb/Mar margin structures are similar due to carries in both the ethanol & corn markets.
If indeed the deflation winds continue to blow, it would seem possible that ethanol and energy have already done their job, which is what the technical picture has been indicating for past 3 weeks. If that is the case focus will go to the stock market run eventually where headwinds could prove too much for this market to extend topside. Danger there is the position of the market in both timing and price – a setback would potentially catch the market leaning to the bull side. Historically, deflationary markets are not kind to equity prices!