U.S. Ethanol Producers Seek Pricing Reform as Markets Plunge, ADM Sells
by Jarrett Renshaw and Michael Hirtzer (Reuters) U.S. ethanol producers stung by collapsing prices are seeking changes to the way benchmark values for the biofuel are established, arguing the current system used by exchanges is vulnerable to manipulation, according to sources.
The push comes as the key farm belt industry struggles with weak demand growth, a loss of export markets due to the U.S. trade war with China, and aggressive selling by global commodities giant Archer Daniels Midland Co (ADM.N) that have pushed ethanol prices to 13-year lows.
ADM is better placed to survive a long stretch of low prices than its ethanol-focused U.S. rivals, many of whom are concerned the company is deliberately pressuring the biofuel market lower to drive them out of business and are keen for a stable hedging tool to defend against further dips.
Top U.S. ethanol producer POET LLC has asked the CME Group (CME.O) to change its pricing method for a key swap contract used by the industry to hedge, and the rival ICE exchange is contemplating offering an alternative to CME’s product after discussions with biofuels companies, according to three sources familiar with the moves who asked not to be named because they are not authorized to speak publicly.
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The issue has become more urgent as slumping prices force ADM rivals like Green Plains, POET and Valero to shut, idle, or sell off plants. U.S. ethanol prices have dropped below $1.20 a gallon 1ZEc1, the lowest in about 13 years, with inventories swelling to records.
POET, the nation’s leading ethanol producer at two billion gallons a year, last month filed a complaint about the issue with CME, which sets the rules for the ethanol swap contract, the company confirmed to Reuters.
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A rival derivatives exchange, Intercontinental Exchange Inc (ICE.N), is considering offering an alternative to CME’s contract that would incorporate some of the changes sought by ethanol traders, such as using a full-day average physical price to determine the settlement price, the two sources, along with an additional source familiar with the effort, told Reuters.
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Separately, terminal operator Zenith Energy Management is talking to traders about the possibility of a new ethanol storage hub in Joliet, Illinois, to rival Kinder Morgan Inc’s (KMI.N) Argo terminal near Chicago – the main delivery point for Chicago ethanol, the two sources familiar with the efforts said.
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The terminal, about 30 miles south of Argo, would allow shippers to bypass congested rail lines in Chicago and provide a new outlet to other trading hubs where prices are higher. READ MORE
Kinder Morgan starts storage construction projects (Tank Storage Magazine)
Excerpt from Tank Storage Magazine: A total of 105,000 barrels of additional ethanol storage capacity is being added to Kinder Morgan’s Argo ethanol hub, including both the Argo and Chicago Liquids facilities. There will also be enhancements to the system’s rail loading, rail unloading and barge loading capabilities.
An upgrade of the Battleground Oil Specialty Terminal, a leading fuel oil storage terminal on the Houston Ship Channel has also been authorised. The work comprises adding a pipeline to allow for segregation of high sulphur and low sulphur fuel oils. Detailed engineering and design work is underway on the $22 million project, which is expected to be operational in the fourth quarter of 2020. READ MORE
