The ethanol market this week will focus on:

• corn prices as time is running short to get the corn crop in the bin and as demand is running strong,
• gasoline prices, which edged to a new 1-year high last week and provided underlying support for ethanol prices, and
• this Friday's monthly ethanol report for August, which could show another new record high in U.S. ethanol production.

November CBOT Ethanol futures prices last week rallied sharply for the fifth consecutive week, closing up 13.7 cents (+7.4%) at $1.985 per gallon and posting a new 13-month high.  Bullish factors included (1) the 6.9% rally in corn prices and the 3.3% rally in gasoline prices, (2) continued strong demand for ethanol based on favorable blender economics, and (3) short-covering and new technical buying with the new 13-month high. 

The EIA this Friday will release the monthly ethanol figures for August.  Last month's report showed that U.S. ethanol production in July rose sharply by 8.4% m/m to a new record high of 948 million gallons.  Even if ethanol production rose further in August, however, the ethanol market is not likely to take that as a major bearish factor since the strength in ethanol prices in the past month clearly shows that ethanol demand is very strong.  That means that inventories are likely to remain relatively tight.  In fact, last month's report showed that the ethanol inventory/production ratio in July fell to 63.3%, the lowest it has been at any time in the past 5 years.

International land use change (ILUC) became a topic in the popular press last week after an article in Science Magazine by well-known biofuel-skeptic Tim Searchinger renewed his complaint that Kyoto greenhouse gas calculations do not make any provision for claims that biofuel production causes deforestation (see news digest links on p. 2).  The ethanol industry fired back that ILUC is overplayed, is based on shaky science, and is simply being used by skeptics to torpedo biofuel support policies.

Ethanol/Gasoline - Nov gasoline futures prices last week extended the 4-week rally to post a new 1-year high and close higher by 6.45 cents (+3.3%) at $2.0438 per gallon.  Bullish factors last week included (1) continued technical strength, (2) the slightly lower close of -0.2% in the dollar index, and (3) general expectations for stronger demand with the global economic recovery.  Ethanol prices last week rallied by more than gasoline prices, causing the spread of November ethanol prices minus gasoline prices to rise by 7.3 cents to -5.9 cents per gallon.

Ethanol/Corn - Dec corn futures prices last week extended the 5-week rally to a total of $1 per bushel, posting a new 4-month high and closing the week up 25.75 cents (+6.9%) at $3.9775 per bushel.  Corn prices  have rallied sharply in the past month due to strong demand and the wet weather, which has slowed the harvest and reduced yields for the late-developing crop.  As of October 18, only 17% of the U.S. corn crop had been harvested, far behind the 5-year average of 46%.  However, the forecast is better for the next two weeks and corn prices therefore slipped last Friday.  Ethanol prices rose by more than corn prices last week, thus allowing the Dec ethanol-corn crush margin to rise by 4.8 cents to 51.3 cents per gallon, which was just below the recent 1∂-year high of 52.8 cents.

Ethanol Calendar

• Oct 26:  Weekly USDA Crop Progress
• Oct 28: Weekly DOE Gasoline Inventories
• Oct 30: EIA Monthly Ethanol Report
• Nov 10: USDA WASDE Crop Supply-Demand

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