Ethanol futures surged the most in more than five years in Chicago after a government report forecast corn supplies will be lower than an earlier estimate, signaling higher costs for plants that make the biofuel.
Futures climbed after the U.S. Agriculture Department estimated the domestic corn crop will fall 3.4 percent from a year earlier, the second reduction to its forecast in as many months. The grain is the primary ingredient used to make ethanol in the U.S.
“The big story is a very bullish grain report,” said Dan Flynn, a trader at PFG Best in Chicago. “The profit margin to make ethanol is going to go up because it costs more to make it.”
Denatured ethanol for November delivery advanced 19.6 cents, or 9.9 percent, to settle at $2.184 a gallon on the Chicago Board of Trade, the highest price since Sept. 30, 2008. The percentage increase was the biggest one-day gain since September 2005. Futures have followed the price direction of corn in 15 of the past 16 sessions.
Corn production will total 12.664 billion bushels, down from 13.16 billion projected a month ago and less than last year’s record 13.11 billion, the U.S. Agriculture Department said today in a report. The average estimate of 26 analysts surveyed by Bloomberg News was for 12.977 billion bushels.
Corn for December delivery rose the exchange limit 30 cents, or 6 percent, to $5.2825 a bushel in Chicago. One bushel of the grain distills into about 2.75 gallons of ethanol.
The corn report “will be a driving force” in the ethanol market over the next few trading sessions, Flynn said.
“There’s no way they would sell ethanol with corn at these prices sub-$2,” said Jason Ward, an analyst at Northstar Commodity Investments LLC in Minneapolis. “I wouldn’t. Based on corn prices you’d lose money if you did. That’s why it’s so critical for the end-user to be awake.”
In cash market trading, ethanol in Chicago gained 14.5 cents, or 7 percent, to $2.225 a gallon and in New York the biofuel jumped 13.5 cents, or 6.2 percent, to $2.315, according to data compiled by Bloomberg.
Ethanol on the West Coast increased 11.5 cents, or 5.2 percent, to $2.315 a gallon and in the U.S. Gulf the additive gained 9.5 cents, or 4.3 percent, to $2.30.
With ethanol at these prices, producers should buy corn right now to lock in margins and hedge against corn prices going higher over the next several days, Ward said.
Volatile corn prices and bad bets on the grain contributed to the bankruptcy of at least a dozen ethanol producers over an 18-month stretch that started in October 2008, which included VeraSun Energy Corp., once the largest American distiller.
Poet LLC, in Sioux Falls, South Dakota, is the largest U.S. ethanol maker, followed by Archer Daniels Midland Co., in Decatur, Illinois, and Valero Energy Corp. in San Antonio.
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