Why the ethanol market is in sharp backwardation ?

R

Rachmaninov

The ethanol market (ACF or AC) is in sharp backwardation for years.
It doesnt make much sens for me because corn (input) is in contango and crude oil (substitute output) is slightly in backwardation

Who is selling at sharp discount on long term expiries ?
 
Ethanol is a really complicated market. Supply and demand depend on Renewable Fuel Standard Policy( the amount of ethanol the government wants blenders to put in each gallon of gasoline ), on the quantity of RINs they can buy as a substitute to ethanol production, on corn and gasoline prices...In the end, I guess that it is more the permanent immediate need for ethanol which creates backwardation than anticipation of lower prices ahead...But I can be wrong.
 
DTN had some really nifty tools for the ethanol market. One of the cool things you can do is overlay the ethanol crush ( corn and Nat gas ) versus unleaded gasoline. It used to be a remarkable charting excercise but then it got a bit schizophrenic. I agree completely that ethanol is a very complex market - especially in terms of physical supply and The sheer number of co-ops involved. I don't know much about it at all and would love to learn more. I think it's role as a gasoline additive is here to stay at modest ratios. I put E-85 in my truck from time to time just for the hell of it.
 
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Who is selling at sharp discount on long term expiries ?
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Does anybody know who the largest producers are? I do have an old trading associate who I understand now lives in Oklahoma and he supposedly trades ethanol on the physical market OTC. If I can dig up his email I'll shoot him an email and ask. Although if he's involved he might be a bit cagey with his response.
 
TraDaToR said:
From 2012:

http://farmindustrynews.com/ethanol/5-largest-ethanol-producers
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Thanks so much ! That link went immediately into the favorites section on the browser.

This is strictly a WAG, based on my own experience trading fuels and power for a major commercial net long producer, but the selling pressure on the long term expiries is almost certainly one or more of these big producers locking in margin. And of course, another big commercial - like a net short user ( consumer auto fuels blender ? ) likes the price and is taking them. Both are hedging. That's my guess.

Maybe John will return my email and name names.
 
By my count (research from two months ago) the linked 2012 article is still accurate - the top five companies have about 43% of nameplate capacity. Some of the firms have acquired plants since 2012 and many plants can operate in excess of 100% of nameplate, but I don't think the rankings would change much. Once you get beyond the top half-dozen firms, it's still a very fragmented industry.
 

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The fact that it's fragmented would make it an excellent arbitrage opportunity for a physical OTC trader. Especially since the traders at the smaller producers are typically not well paid so they have less motivation to seek out the best price. A prop trader at Cargill or Koch Would be much more active and aggressive.
 
My old Energy Company used to buy power so cheap from a municipal power plant in Springfield Illinois that it eventually was found out by other trading companies and it became a substantial scandal. One coal plant whose trader was paid a modest city government salary and he just didn't give a shit. He sold to the first phone call.
 
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