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Commodities Trading: An ethanol glut

Posted March 27, 2008

"We’re on track to produce more ethanol than Congress wants. Between the planting seasons of 2007 and 2009, U.S. ethanol production is expected to overshoot by 8.3 billion gallons." — Sara Nunnally

by Sara Nunnally

Baltimore – (TFN): This chart shows projected ethanol production in the billions of gallons (the blue line) versus production estimates mandated by Congress (the red line).

As you can see, we’re on track to produce more ethanol than Congress wants. Between the planting seasons of 2007 and 2009, U.S. ethanol production is expected to overshoot by 8.3 billion gallons.

That’s a big overshoot.

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When the government passed the Energy Policy Act, dozens of companies rushed into the ethanol business. Right now there are 145 ethanol plants in operation, and a further 57 plants are under construction.

With this glut, is it any wonder that ethanol prices are now trading terribly? This has all the trappings of a bubble in the making…

Things are just going to get worse over the next few years. We could see the ethanol price collapse again, just as it has in the past. (In 2007, the price of ethanol tumbled from more than $4 a gallon to $1.53 a gallon.)

In fact, the only reason ethanol prices are rising now is because of the price increases in oil and corn. Those prices in turn are driven by dollar weakness, not a supply crunch.

After 2009, the picture could change and ethanol could look bullish again. But for now, ethanol producers have lots of supply and more tough times ahead. View a chart of ethanol production versus congressional mandates and find more from Sara Nunnally.

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Posted by Sara Nunnally · Filed Under Oil and Energy 

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