The U.S. ethanol update released last week revealed that this bio-fuel had again set record daily and monthly output levels during November. According to the Energy Information Administration, daily output rose to 479,000 barrels per day-up 27,000 from the previous month. Meanwhile, the total U.S. output increased to 603 million gallons, even though there was one less operating day during the period. East Coast stock replenishing and firming prices helped strengthen the nation's ethanol plant capacity utilization by 3.8% to 104.7%. That is its highest level since May 2007-using the Renewable Fuel Association's (RFA) operating plant list for that month, which included three new plants coming online for a total of 160 million gallons of new bio-refinery capacity. U.S. ethanol stocks slipped during November to 11.194 million barrels, down 229,000 from the previous month. This was an encouraging sign that energy firms were beginning to see the benefit of blending a lower-cost fuel into gasoline, to extend supplies when crude oil prices pushed above $98 a barrel last fall.

In the last month, three new bio-refineries have came online and one plant expanded its operation, resulting in the largest one-month increase in new facilities ever reported by the RFA-and bringing this association's overall U.S. plant capacity to nearly 7.9 billion gallons. Of note, Ohio and the Texas Panhandle saw the opening of the first plants in these areas this month. After 3 months of no new ethanol plants being added to the RFA's new construction list, two sites in California and one in Nebraska were added totaling 149 million gallons in capacity.

With the U.S. ethanol industry fast approaching its most ambitious expansion period in its history this spring and summer, the delicate balance between the cost of its feedstock  (corn) and the price of gasoline being high enough to encourage more discretionary blending into the U.S. conventional fuel supplies will be a very tricky road for ethanol. Encouraging signs include Florida and Georgia moving toward using 10% blended fuels early in 2008, and the nation's rail carriers beginning to show improvement in their delivery capabilities. However, keeping profitable processing margins while also keeping a price discount to gasoline could be a challenge. The 2007 Energy Bill's higher renewable fuel standard level of 9 billion gallons for calendar 2008 will prompt more distributors to upgrade their facilities to use ethanol, but the added incentive of higher profits will be the strongest reason they speed up this investment.

Because of this challenge, corn's current ethanol demand could be overstated by 100 million to 150 million bushels, but this won't be definitively known for the U.S. Department of Agriculture to act on until this later this spring. The need to limit corn's U.S. acreage to 5 million acres switches to spring wheat, soybeans or other crops and growing season concerns could advance nearby corn to its all-time highs of $5.54 or above. But producers should have spring marketing needs covered at current prices, and have 35% of new crop priced because of expanding 2008/09 wheat crop reducing overseas demand and domestic price rationing. This could let prices slip to $4.50 or below. 

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