EU ethanol corn crush margins turn negative on global corn rally

The simple ethanol crush margin from corn for EU ethanol turned negative on May 4 despite European ethanol prices hovering near six-month highs, as a continued rally in global corn prices pushed Euronext's front-month corn futures to all-time highs.

EU ethanol simple crush margins dropped from plus Eur15.23/cu m on May 3 to minus Eur10.42/cu m as of May 4, the lowest level since February 22, as a rally in EU undenatured ethanol prices to levels last seen in October was more than offset by strength in global corn prices.

Euronext's front-month corn futures contract, from which crush margins are calculated, hit an all-time high on May 4 at Eur246.50/mt, adding further pressure to EU ethanol producer's crush margins.

The easing of lockdown restrictions in several European countries in April improved land mobility figures and in turn ethanol demand, with one source saying: "Mobility in April was much better than March, it seems like we have tuned a corner in the ethanol market."

Moreover, the rise in pace of vaccine administration in the EU and the European Commission announcing May 3 plans to allow travelers who are fully vaccinated to travel within the EU, which could be adopted as early as May 5 according to media reports, vindicated earlier bullish sentiment on a demand bounceback as we enter the EU summer driving season, a source said.

T2 ethanol physical spot prices hit a six-month high on April 27 at Eur628.25/cu m FOB Rotterdam, the highest level since October 21, prior to the second lockdown restrictions being introduced across the EU. It had fallen back from those highs to be assessed at Eur607/cu m FOB Rotterdam on May 4.

However, other market players see the rise in feedstock prices as the main driver of ethanol prices of late in Europe, highlighting that demand for ethanol continues to be depressed with mobility still at more than 30% below pre-pandemic levels, and arguing that the rise in T2 prices was fundamentally unjustified.

Negative EU ethanol crush margins from corn since December 2020, along with an equivalent rally in wheat keeping crush margins in negative territory since October, has strengthened the correlation between grain and ethanol prices recently, market sources said.

"I agree that grain price correlation to ethanol is not so strong at times of healthy crush margins, but currently I believe that the rally in grains and US and Brazilian ethanol prices at multi-year highs is what is driving ethanol prices in Europe," a source said.

Unfavorable weather conditions in the US and South America observed over the last few weeks have generated concerns over the yield and production levels for the 2021 crop in these regions.

Dry weather in Brazil resulted in low soil moisture, causing delays in planting. About 50% of the corn crop was planted later than the advised period. Also, persistent dryness in some regions of Brazil may reduce yields, according to sources. Platts Analytics estimates Brazilian corn production at 107.5 million mt with further reductions anticipated.

Similarly in the US, below normal rainfall and low temperatures have delayed the planting and may have a negative impact on yields. However, farmers accelerated the planting campaign with 46% of the planned acreage planted as of April 30, according to the US Department of Agriculture, compared with market estimates at 35-40% and a five-year average of 36%.

This situation also provided support to the old crop. The market's reaction was prompt and significant: CBOT May corn futures have risen by 33% since the beginning of April to 744.75 cents/bu on May 4, the highest since 2013, driven not only by fundamentals but also some speculative buying, according to sources.

Prices in Brazil and Ukraine, the main corn suppliers to the EU, have also significantly increased although at a slower rate than CBOT corn futures. Platts FOB Brazil has gained 22% since the start of April to $283.55/mt on May 4 while Platts FOB Ukraine prices increased by 10% to $285/mt over the same period.

Consequently, Euronext's front-month corn futures contract hit all time highs on May; settling at Eur246.50/mt, adding further pressure to EU ethanol producer's crush margins.