The ethanol market is splitting in two, which is having a big impact on the crops used to make the biofuel: corn in the US, and sugar in Brazil.
There’s a massive ethanol glut in the US. That’s helping to drive corn prices lower. July futures are trading at a record low and hedge funds are making their biggest bet ever that the losses will continue.
By contrast, biofuel is booming in Brazil, where it’s made from sugarcane. With more cane being diverted to ethanol, it means less production of sweetener. That’s signalling that the sugar market can finally start to stabilise, and money managers are retreating from their wagers on price declines.
Prices for Brazilian biofuel have jumped about 19% this year. By contrast, June ethanol futures in Chicago are down about 1% in 2019.
The divergence partly stems from President Donald Trump’s trade war after retaliatory tariffs from China squashed demand for US shipments. At the same time, his administration is still working to fulfil its promise for a regulation change that would allow the sale of higher ethanol blends during the summer driving season. In Brazil, where the biofuel competes directly at the pump with gasoline, rising energy prices are fuelling increasing consumption. The US ethanol industry has gotten so bad agribusiness giant ADM on Friday said it’s considering spinning off its biofuel business after narrower ethanol margins were behind its biggest quarterly earnings miss in five years.
As ethanol goes, so goes corn. Investors keep piling into wagers on price declines for the grain, with roughly a third of the US crop used to make the biofuel. As of April 23, they held a net-short position of 322,215 futures and options, US Commodity Futures Trading Commission data showed on Friday.
The figure, which measures the difference between bets on a price increase and wagers on a decline, is the most negative since the data begins in 2006.
At the same time, funds are backing out of their bearish sugar holdings. Investors had a net-short position of 29,666 as of April 23, down from 44,478 a week earlier and the sixth straight decline.
As traders sit on their thumbs in anticipation of a US-China trade deal, some relief for American biofuel could come from an unlikely source: rival Brazil.
With Brazil’s domestic prices at all-time highs – even as millers produce record amounts – exports of US ethanol are flowing to the Southern Hemisphere.
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