The ethanol market this week will focus on:

• the corn market ahead of this Wednesday's USDA report where the market consensus is that the USDA will cut the corn crop size slightly by 0.5% to 13.08 billion bushels and leave the carry-over figure unchanged at 1.719 billion bushels,
• gasoline prices, which rallied to a new 2-month high last Friday, and
• the ethanol supply situation which is a growing problem, although demand should improve with ethanol at its cheapest level relative to gasoline in 19 months.

April CBOT Ethanol futures prices fell sharply late last week to post a new 5-1/2 month low and close 10 cents lower (-5.8%) at $1.625 per gallon.  Ethanol prices have now fallen sharply by 35 cents in the past two months, mainly because of rising ethanol production and the record high of 1.056 billion gallons posted in December.  Ethanol prices have failed to get much support from the sharp 30-cent rally in gasoline prices seen since February 8, illustrating the negative impact the supply overhang is having on the ethanol market.  Ethanol prices have also been unable to get a boost from stronger corn prices seen in the past month, although corn prices fell sharply last Friday and closed the week down 3.5%.

EPA says decision on E15 will come by late summer -- Environmental Protection Agency Administrator Lisa Jackson told Congress last week that the EPA will decide by late summer whether to allow a higher ethanol blend  than the current 10%.  The EPA delayed the decision, which was originally due at the end of 2009, in order to provide time for more testing.  The EPA has said that initial data shows that an E15 blend causes no damage to automobiles made after 2001, suggesting that the EPA may allow E15.  Ethanol currently accounts for about 7% of the U.S. fuel mix.  The ethanol industry believes that E15 is critical for the industry to boost demand and meet the RFS2 mandate for 15 billion gallons of corn-based ethanol by 2016. However, even if the EPA rules in favor of E15 by late summer, that will not help the current oversupply situation.

Ethanol/Gasoline - April gasoline futures prices last week rallied to a new 2-month high and closed 8.31 cents higher on the week at $2.2710 per gallon.  Bullish factors last Friday included the stronger-than-expected February payroll report of -36,000 and technical strength with the sharp 4-week rally.  On the bearish side, U.S. crude oil inventories in last Wednesday's report rose to the highest level since August and are now 5.7% above the 5-year seasonal average.  The spread of April ethanol prices minus gasoline prices fell sharply by 18.3 cents to -65.6 cents per gallon, which left ethanol at its cheapest relative to gasoline since August 2008.

Ethanol/Corn - May corn futures prices last Monday edged to a new 7-week high but then fell sharply and closed the week 13.5 cents lower (-3.5%) at $3.7550 per bushel.  Bearish factors included increased estimates for the South American corn crop and underlying weakness in ethanol prices, which hurts ethanol profitability and production.  However, there is still underlying support for corn prices from concerns about farm field flooding as a heavy layer of snow melts in most of the corn belt.  The May ethanol-corn crush margin last week fell by 5.3 cents to 28.8 cents per gallon, which was near a 9-month low and was far below the recent 2-year high of 73.6 cents.

Ethanol Calendar

• Mar 10:  Weekly DOE Gasoline Inventories
• Mar 10: USDA WASDE Crop Supply-Demand
• Mar 17: OPEC's quarterly meeting
• Apr 8: EIA Monthly Ethanol Report
• Late Summer: EPA E15 decision due

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