U.S. ethanol ends volatile first half lower

July 3, 2014, Houston, Tx. (Argus) — U.S. ethanol prices have
dropped about five per cent following a volatile first half of 2014, when weather-related
rail congestion boosted prices to levels not seen since corn-based renewable
fuel was first mandated for U.S. usage in 2006.

Prices for Renewable Identification Numbers (RINs),
meanwhile, have recovered as much as 23¢/RIN, or 71 per cent, as regulatory risks
regarding 2014 blend requirements have returned to the forefront of the
markets' concerns. While railroads work to add capacity to de-bottleneck
congested areas, it is unclear whether it will be adequate to allay disruptions
during the upcoming winter.

Bullish market dynamics propelled ethanol to over $4/gal. in
March. The harsh winter disrupted rail operations around the key U.S. Argo
terminal, while increased competition from crude-by-rail pressured other
rail-bound commodities.

As railcars were bottlenecked and turnaround times spiked,
producers lacking the storage cut production or shut plants altogether. At the
same time U.S. exports of corn-based ethanol peaked at 2.1mil. barrels for March,
sending inventories to a five-month low at just over 15mil. barrels. Stout
backwardation also drove away most waterborne deliveries. The resulting
volatility was unprecedented, with a $2/gal. gain seen in less than three
months.

The ensuing sell-off was even more dramatic as the arrival
of fresh imports and improving weather allowed physical deliveries to resume.
Tumbling feedstock costs contributed as well, with the front month CBOT corn
futures contract shedding over $1/bushel from their April high of
$515.75/bushel. Producers are still facing good margins with the CBOT crush
spread spending the bulk of the first half at over $1.50/bushel.

Ethanol prices have dropped since peaking in late March,
with foreign ports now eyeing imports in the fourth quarter, spurred on by
weakness in corn prices. Indeed, U.S. Gulf coast spot ethanol averaged a 16¢/gal.
discount to fob Brazil product during the month of June.

RINs have provided some strength to the physical ethanol
market as regulatory risk continues to command a premium. While the extension
of the 2013 compliance deadline by the Environmental Protection Agency to
September has provided relief to some obligated parties, the market continues
to eagerly await 2014 renewable volume obligations.

RINs rallied in mid-June from their first-half low of
30¢/RIN seen in January after the America Petroleum Institute (API) expressing
concerns that the EPA may raise the 2014 ethanol mandate.

The substantial recovery in current year ethanol RINs
suggests that the market is betting on an increase in the 2014 renewable
mandate, particularly when viewed against the collapsing B14/E14 spread which
narrowed to as little as 2.75¢/RIN from the first half high of 20¢/RIN.

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