Spend Matters welcomes a guest post from Samantha Miles of Mintec.
Back in October last year we said that Corn prices are expected to stay at low levels until the end of 2013, and this should keep the price of ethanol down, which it did, however things are now changing.
Since the beginning of 2014 ethanol prices have been climbing and have increased by 40%. Due to its importance as a feedstock, the price of ethanol in the US is closely linked to the price of maize in the US. Maize prices have also seen an upward trend since the start of the year. These increases are due to the weather, demand and political uncertainty.
Back in January a freezing polar vortex across two-thirds of the US caused chaos for maize and ethanol production as well as forcing railroad links to come to a standstill in the Midwest, a major region of ethanol production. This prevented the ethanol from reaching the coasts where it is either mixed with gasoline or exported. US ethanol supplies usually build up over winter months ahead of a summer drive, however, due to the rail capacity limitations and strong demand the stockpiles are declining.
The US is a mostly self-sufficient country when providing maize for the production of ethanol; however the supply of maize globally can affect ethanol prices. Buyers who would traditionally buy from Ukraine, the 3rd largest exporter of maize, have been seen to turn to other regions in case of supply disruptions, causing higher demand for US maize and the price to rise. Also, in Ukraine farmers are holding back the grain to protect themselves against the country's falling currency reducing the available stocks for exports.
Ethanol prices can also be heavily influenced by US government mandates regarding the amount of ethanol that must be blended into gasoline. There are rumours that the government may reduce or even scrap the mandate, which if realised, the consequential reduction in demand could see ethanol prices drop substantially.
However, there could be hope for ethanol buyers on the horizon. The industry has agreed upon plans to increase ethanol production levels in order to rebuild stockpiles. This includes the restart of an ethanol plant in California for the first time in five years.