U.S. ethanol prices have lost considerable ground to gasoline over the past two years but Canadian prices have been insulated against a similar slide.
In mid-2006, U.S. ethanol was selling at a significant premium to gasoline as demand for the alternative fuel exploded when it became a common replacement for methyl tertiary-butyl ether (MTBE), a fuel oxygenate that was found to be polluting ground water.
“That (premium) has continued to erode until the lows of this June,” said Rick Kment, ethanol analyst with DTN.
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At the start of 2008, reformulated gasoline blendstock for oxygen blending (RBOB) was selling at a 13 cents US per gallon premium to ethanol. That gap has widened to 65 cents per gallon and was as big as $1.10 per gallon at the beginning of June.
Kment said increased ethanol supply and savvy purchasing by blenders has dramatically changed the price dynamic between the two commodities.
That’s not the case north of the 49th parallel, said Brad Wildeman, president of Pound-Maker Agventures Ltd., one of the few ethanol plants operating in Western Canada.
“The U.S. situation is somewhat different than ours up here.”
Canada’s ethanol market is so tiny that oil companies are procuring the product directly from suppliers under agreements that use a formula tying ethanol prices to the rack price of gasoline.
Right now that’s an advantage for the Canadian plants because their commodity has more closely followed the steady rise in gasoline prices than that of their U.S. counterparts. But a couple of years ago, U.S. plants were getting a lot more for their product.
“It comes and goes. Pick your poison,” said Wildeman.
Part of the reason U.S. ethanol prices lag behind gasoline is the mounting supply south of the border. The industry has the capacity to produce 27.4 billion litres of product and a further 23.5 billion litres of capacity is under construction. Federal mandates call for 34 billion litres of the fuel to be blended at the pumps in 2008.
Kment said the oil industry is meeting all of its mandatory blending requirements through domestic supply and imports, which means any additional ethanol purchases are discretionary. Those discretionary purchases are being made at a discount to gasoline because ethanol is more expensive for blenders to transport and store.
The ethanol market is also more volatile than the gasoline market because it is too small to attract the speculative traders that can smooth the ups and downs. Blenders are good at watching for dips in the ethanol market, holding off on long-term buying until they feel the market is at or near the bottom of a trough.
Kment said people need to realize that while ethanol prices are related to gasoline prices, it is its own market.
“It’s unlikely we will see a strong correlation between the two anytime soon,” he said.
So while both commodities have generally been on the rise for the past couple of years, their trend lines look different.
For instance, there will continue to be seasonal differences between the two commodities, with the price gap narrowing during November through March when additional supplies of ethanol are required to meet oxygenate requirements in various states and municipalities.
“This year, the closest that ethanol has traded to gasoline was six cents in the middle of January,” said Kment.
Wildeman said Canadian ethanol plants don’t have to worry about that kind of volatility and he doubts that will change as more facilities come on line north of the border.
His company attempted to establish a spot-market distribution system in the past but was quickly shut down by the three or four big oil companies that control the vast share of Canada’s retail gasoline sales.
They like the predictability of ethanol prices under the current supply agreements even though it is costing them more than U.S. ethanol of late.
