Spend Matters welcomes a guest post from Nick Peksa, at Mintec Ltd.
On the December 3, 2012, the New York Mercantile Exchange, Inc. (NYMEX or Exchange) delisted 59 energy products. There was no open interest in these contracts. One of these was the New York Harbor Ethanol Futures - New York Harbor is a key hub for the import, storage and distribution of ethanol on the East Coast. So this reflects a physical market for delivery on a 36-month forward-rolling contract.
"The biofuel industry was pleased that Congress in the hard-fought fiscal cliff legislation approved several measures to support biofuels. The bill extended the cellulosic biofuel producer tax credit through 2013 and also said that algae will be treated as an advanced biofuel that qualifies for the credit. The bill also extended the alternative fuel infrastructure tax credit through 2013, which is necessary to encourage the investment to install E15 pumps and break the current 10% blend wall." – Source: CME.
Production of ethanol has rocketed in the US over the last few years, from 1 billion gallons in 1990 to 14.41 billion gallons in 2012. The US production capacity this year has grown to 14.7 billion gallons with 158 million more gallons coming online. Also, for the first time in recent history, the US is importing more ethanol than it is exporting (around 1 million barrels a month in favour of imports).
Corn is the main feedstock for ethanol in the US (23-40% of the crop goes into ethanol production). In 2012, a drought led to an increase in ethanol prices due to the rise in the cost of corn, despite a fall in crude oil prices at the time.
Corn crops in 2012 in the US and Russia suffered the harshest droughts in decades. World production dropped by more than 5% from the previous season. Nevertheless, the US harvest is considered to have been substantially better than expected, having benefitted from increased planting at the expense of cotton and soya. However, in the face of continued strong consumption, available stocks are still expected to fall.
So with tax breaks, volatile feedstocks, rocketing production and tight supply and demand - for a physical market that has "no open interest" it suggests that everyone wants to trade in the short term, lower volumes, but no one really wants use these future market tools to protect their business interests by receiving physical delivery of ethanol. Relying on speculative futures is probably more fun.
- Nick Peksa, Mintec Ltd.