Recent Ethanol Blending Margins
by Scott Irwin (University of Illinois/FarmDocDaily) Ethanol prices went on a tear in March and April 2014 and reached new record levels exceeding $3 per gallon (see earlier farmdoc daily articles here and here). A single factor did not appear explain the price rise, but instead, a combination of factors created something of a perfect storm. The question addressed in today’s article is whether the rising ethanol prices caused ethanol blending margins to go negative. The ethanol blending margin is important for several reasons, including the net impact of ethanol on gasoline prices at the pump, compliance costs for the RFS, and the pricing of RINs.
The conventional approach to computing the E10 blending margin is to compare wholesale ethanol and CBOB (or RBOB) gasoline prices. We focus here on CBOB prices because this is the feedstock for about two-thirds of the finished gasoline used in the U.S. Positive ethanol blending margins in this approach result from ethanol prices that are below the price of CBOB gasoline and vice versa. Positive (negative) margins result from blenders purchasing ethanol at a lower (higher) price per gallon than CBOB and selling the blend at the retail level at an equivalent price to CBOB. This type of analysis assumes that E10 at the retail level does not have to be priced at a discount to reflect the lower fuel efficiency of ethanol since ethanol is such a small portion of the blend and the loss of efficiency is not easily discernible by the consumer. As indicated in Figure 1, the wholesale price of CBOB gasoline at Chicago was generally higher than the price of ethanol from January 25, 2007 through May 15, 2014. The difference in the two series, however, varied considerably over that period. Close inspection of Figure 1 reveals that ethanol prices moved well-above CBOB prices during the heart of the ethanol price spike in March and April 2014. Specifically, ethanol prices exceeded CBOB prices by an average of $0.30 per gallon during the four weeks between March 20 and April 10. Since that time ethanol prices have once again settled well-below CBOB prices.
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Ethanol prices increased about 60 percent to new record levels in late winter. Despite this huge increase, ethanol blending margins remained positive for all but a few weeks. This surprising outcome can be traced to the highly positive blending margins that existed at the start of the spike, providing a healthy margin cushion as ethanol prices rose, and the 20 percent increase in wholesale gasoline prices that occurred in parallel with the ethanol price spike. The fact that the ethanol blending margin became negative for such a short period of time with record high ethanol prices speaks to the firmly entrenched position of ethanol as the cheapest source of octane currently available for E10 gasoline blends. READ MORE and MORE (Ethanol Producer Magazine)
