When does drought help out US ethanol producers?
When it means that supplies of their key raw material, such as corn, get trapped, giving local buyers a captive market.
That’s what many US biofuel manufacturers are finding, as record low Mississippi River levels leave barges beached, and crops stranded in the Midwest, rather than being transported to Gulf ports for shipping.
Ag giant Archer Daniels Midland highlighted the improved ethanol production margins last week, reporting them averaging $0.52 per gallon for the July-to-September period, up from $0.36 in the previous quarter, and more than double the $0.23 per gallon achieved in the third quarter of 2021.
And The Andersons this week underlined the trend, as it reported its ethanol division returning to the black, thanks to “better margins in our ethanol plants”.
Sure, this reflects in part a “good” local harvest, which would anyway undermine prices.
However, the back-up caused by the Mississippi crisis has only enhanced the effect by dragging basis – the local price compared with the value dictated by Chicago futures – to unusual levels.
Indeed, Midwest basis for corn and soybeans fell “much sharper than usual” amid its harvest-time slide this year, the University of Illinois said, noting the tumble, “coinciding with the disruption along the river and surging barge rates”.
In southern Iowa, for instance, basis has fallen at Mississippi River docks to a negative $0.46 per bushel, more than twice the discount of a year before.
In Illinois, the basis at Peoria on the Illinois River (a Mississippi tributary) is, at a negative $0.23 per bushel, also a multiple of year-ago levels.
Still, gain for inland ethanol plants has meant pain for shippers from the Gulf ports at the end of Mississippi.
There, corn basis has jumped to a positive $1.98 per bushel, the highest since 2000, reflecting the costs of getting crop to port.
“We continue to observe an extreme divergence between the Gulf and regions along the river,” with the premium of Gulf prices over Midwest ones at record levels, the University of Illinois said.
The benefit is also not so marked for ethanol producers in the western Corn Belt, which are not so reliant on the Mississippi for transport, and where somewhat disappointing yields have limited harvest pressure on crop prices too.
“We believe that our eastern [Corn Belt] ethanol plants are favourably located, while western plants are facing much higher corn bases,” said Pat Bowe, The Andersons chief executive.
“The one area it hurt us is in our Kansas ethanol plant has high basis levels, and that has made margins very difficult.”
Green Plains too, unveiling a loss of $73.5m for the July-to-September quarter, blamed “historically higher corn basis”. Its output is focused on Nebraska, just to the north of Kansas.