While most of the petroleum complex is trading near its highest levels in a couple of months, the part of the industry that matters most to farmers is headed in the other direction. Crude oil, diesel and gasoline all rallied this week, but ethanol lagged after production dropped to match its lowest level in more than two years.
Prices for the biofuel are barely above decade-long lows set last year, as margins in the industry remain at depressed levels. The only positive factor for plants right now is improved efficiency that’s helping a little.
The sharp decline in production over the past month increases potential for USDA to cut its forecast of corn usage by 100 million bushels in the Feb. 8 crop report. E15 could help improve demand this summer, if rules don’t get bogged down in lawsuits. But for now, gasoline is trading at only an 11% premium to ethanol, not a wide enough gap to encourage blending.
Exports are the saving grace, with data out today showing shipments through November already put 2018 totals at record annual levels. Brazil and Canada account for more than half that business. China is way down the list but could become a large potential market it if follows through on plans to roll out an E10 mandate nationwide next year.
Unfortunately, tractors don’t run on E85. Diesel costs continue to rise after making lows at the start of the year, when I recommended booking spring, and if possible, fall fuel needs too. Midwest refiners continue to struggle keeping up with production, even though demand from farmers is scarce. But refiners are buying up available supplies to meet other contracts, keeping cash prices rising.
Diesel could pull back a little yet this winter, but it likely would take a retreat by crude oil to accomplish much of a break. Crude oil closed Wednesday near $54 a barrel, just a dollar under my fair value prices under current fundamentals. Record U.S. production is offset by geopolitical troubles in producing nations around the world, from Libya to Venezuela to Iran and beyond. Global demand doesn’t look robust, but money managers poured funds into futures at the end of the year after prices bottomed around $42. Whether they become overvalued or not likely depends on the flow of headline news, at least for now.
Propane is the only part of the petroleum sector not following along on the recent rebound, polar vortex or not. Supplies are still abundant after a warm start to winter and costs are staying fairly steady. I recommended growers lock in half or more of their drying needs for next fall when prices hit 55 cents off the Conway, Kansas wholesale benchmark, right about where they’re trading currently. There’s potential price prices to slip further over the next month or two, or perhaps longer. But being 100% priced isn’t a bad idea, either.