By – Published 24/06/2015

US ethanol production, which set a record last week, is poised for fresh all-time highs, as strong demand and the prospect of a “mini harvest” of corn support margins, broker Linn Group said.

An official report on Wednesday showed US ethanol production gaining 14,000 barrels a day last week to hit 994,000 barrels a day, the highest on data going back to 2010.

The rise in output came despite margins which have been pressed by the recovery in corn prices, with Chicago futures rebounding more than 5% from contract lows set in mid-June.

“We have seen production margins come down to breakeven in some areas on the fringes of the western Corn Belt,” said Jerrod Kitt at Chicago-based broker Linn Group.

Even in core areas of the eastern Corn Belt, with ready markets for the distillers’ grains feed ingredient made as a byproduct of ethanol manufacture, margins are about 10 cents a gallon, “give or take 5 cents”, he said.

‘Mini harvest’

However, Mr Kitt forecast that the rise in production was sustainable, in part thanks to the prospect of ready supplies of corn ahead, as farmers sell stocks left over from last year’s record harvest.

Mr Kitt said that “a lot of producers are sitting on a lot of corn,” with many growers holding out for higher prices, a strategy which has proved successful in many recent years.

A key US Department of Agriculture report next week is expected to show overall US corn inventories at 4.56bn bushels as of the start of this month, a rise of 18.5% year on year.

The boost to supplies as growers bring crop to market, to clear storage space for the next crop, will be akin to a “mini harvest”, with the potential for pressure on prices.

Inventories tumble

Meanwhile, demand is proving unexpectedly strong.

“The surprise about the latest ethanol data was not the rise in production but the drop in stocks,” Mr Kitt told, noting that inventories tumbled by 878,000 barrels last week to a five-month low of 19.84m barrels.

That is an unusually strong pace of decline and, coming against a backdrop of elevated production too, indicates robust demand for ethanol, which appears to be coming in part from strong exports.

“Canada is our number one export market, but others are pretty active too,” with ideas of strong shipments to the likes of North Africa and the Middle East too.

Booming market

And demand looks like remaining strong for now, with the US driving season ahead too.

“We are going to move between weeks of record production and record consumption,” Mr Kitt said.

“It is definitely going to be an exciting market, if you catch it right.”