The ethanol market this week will focus on:

• corn prices as the weather looks better this week for accelerating the very late harvest, 
• gasoline prices, which moved lower last week on negative overhang from the weak stock market, and
• ethanol blender demand, which should remain strong with the favorable economics of ethanol versus gasoline.

December CBOT Ethanol futures prices last week fell back from the 13-month high and closed the week down 8.8 cents (-4.6%) at $1.846 per gallon.  Bearish factors included (1) the 8.0% sell-off in corn prices and the 4.5% sell-off in gasoline prices, (2) the 1.1% rally in the dollar index, which pressured commodity prices in general, (3) the sharp sell-off seen in stock prices last Friday, which raised questions about the sustainability of the economic recovery and fuel demand, and (4) long liquidation pressure after the sharp 45-cent rally in ethanol prices seen in the past two months.

The monthly ethanol data released last Thursday by the U.S. Energy Information Administration (EIA) was in line with market expectations.  Ethanol production in August fell slightly by 0.1% m/m to 947 million gallons, holding most of the previous month's surge of +8.4% to a record high of 948 million gallons.  U.S. ethanol production back in February 2009 dipped to an 8-month low of 761 million gallons as negative ethanol economics idled some ethanol plants either by choice or because of bankruptcy.  However, ethanol economics have since improved substantially and most of the bankrupt ethanol plants are back up and running again under new ownership.  U.S. ethanol production rose sharply by 25% from February through August.  Despite that sharp rebound in production, ethanol prices have rallied because demand for ethanol has been strong.  In fact, last Friday's data indicated that ethanol inventories in August remained well under control with a stocks/production ratio of 66.5%, which is just mildly above the previous month's record low of 63.3%.

Ethanol/Gasoline - Dec gasoline futures prices last week slipped from the recent 1-year high and closed the week down 9.29 cents (­‑4.5%) at $1.9595 per gallon.  Bearish factors included (1) the 1.1% rally in the dollar index during the week, (2) the 1.0% w/w decline in weekly gasoline demand, which was the third consecutive weekly decline in demand, and (3) the +0.8% increase in weekly gasoline inventories.  Ethanol prices last week fell by slightly less than gasoline prices, causing the spread of December ethanol prices minus gasoline prices to rise by 0.5 cents to -11.4 cents per gallon, which means ethanol remains cheap compared to gasoline, particularly after adding in the 45-cent excise tax credit for ethanol.

Ethanol/Corn - Dec corn futures prices last week fell sharply from the previous week's 4-month high to close 31.75 cents lower (-8.0%) at $3.66 per bushel.  Fields remain very wet and the harvest became the slowest on record with only 20% of the corn crop harvested as of October 25, far behind the 5-year average of 58%.  However, corn prices fell last week due to forecasts for drier weather this coming week, which should allow for farmers to make some good progress on harvesting.  Corn prices fell by more than ethanol prices last week, thus allowing the Dec ethanol-corn crush margin to rise by 2.5 cents to 53.9 cents per gallon last Friday, which was just below last Wednesday's 1-3/4 year high of 56.1 cents.

Ethanol Calendar

• Nov 2:  Weekly USDA Crop Progress
• Nov 4: Weekly DOE Gasoline Inventories
• Nov 10: USDA WASDE Crop Supply-Demand
• Nov 30: EIA Monthly Ethanol Report

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