The ethanol market this week will focus on:

• corn prices as the market continues to watch harvesting progress and yield figures,
• gasoline prices, which broke out to a new 1-year high last week and helped pull ethanol prices higher, and
• blender demand for ethanol, which should improve after last week's sharp rally in gasoline prices left ethanol prices 18.7 cents cheaper than gasoline prices plus the 45-cent excise tax break for ethanol. 

November CBOT Ethanol futures prices early last week extended the 1½-month rally to post a new 1-year high, but then faded late in the week to close +2.4 cents (+1.3%) at $1.848 per gallon.  Bullish factors last week included (1) the sharp 12.0% rally in gasoline prices and the 2.7% rally in corn prices, (2) the 1.1% sell-off in the dollar index, and (3) continued upside technical momentum with the 1-year high.

Vilsack lobbies for higher ethanol blend - U.S. Agriculture Secretary Tom Vilsack last week said that he is pushing the Environmental Protection Agency (EPA) for a hike in the percentage of ethanol allowed in gasoline.  The EPA currently allows up to 10% of ethanol to be mixed in gasoline (E-10), but the ethanol industry has requested a waiver for an ethanol blend of up to 15% (E-15).  The EPA's decision is due by December but the EPA may delay its decision to give more time for engine testing with the higher ethanol blends.  The National Renewable Energy Laboratory (NREL) has found that vehicle engines generally tolerate the higher ethanol blends well but that some non-road small engines such as lawn mowers may have some problems.  An increase in the blending wall from 10% to either 12% or 15% would be a major bullish factor for ethanol prices since it would significantly boost demand for ethanol, which remains substantially cheaper than gasoline after taking into account the 45-cent excise tax break.  

Ethanol/Gasoline - Nov gasoline futures prices last week extended the 3-week rally to post a new 1-year high and close sharply higher by +21.13 cents (+12.0%) at $1.9793 per gallon.  Bullish factors last week included (1) the upside breakout in crude oil prices from the narrow 5-month trading range to post a new 1-year high, (2) last week's sharp 5.230 million barrel (-2.4%) drop in weekly gasoline inventories, and (3) improved demand which is now 4.1% higher than the year-earlier level.  Ethanol prices last week lagged the sharp 12.0% rally in gasoline, causing the spread of November ethanol prices minus gasoline prices to fall sharply by 18.7 cents to -13.1 cents per gallon.

Ethanol/Corn - Dec corn futures prices last week rallied to a new 2½-month high but then faded late in the week to finally close +9.75 cents (+2.7%) at $3.72 per bushel.  Bullish factors included (1) widespread frost that effectively ended the growing season for the late-developing crop and may cause a lower yield than the USDA's latest estimate of 164.2 bushels per acre, (2) poor harvesting weather, which impeded the already-slow harvest (only 13% of corn was harvested as of October 11 versus the 5-year average of 35%), (3) strong demand for a corn crop that is only slowly coming to market thus far, and (4) technical strength with the rally to a new 2½-month high.  The continued sharp rally in corn prices last week caused the Dec ethanol-corn crush margin to fall by 1.2 cents to 46.5 cents per gallon, although it was still strong and was just below the recent 1∂-year high of 52.8 cents.

Ethanol Calendar

• Oct 19:  Weekly USDA Crop Progress
• Oct 21: Weekly DOE Gasoline Inventories
• Oct 30: EIA Monthly Ethanol Report
• Nov 10: USDA WASDE Crop Supply-Demand

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