10-30-2019: December Ethanol: Poliitics versus the Environment

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Point & Figure

Internal Progrm
Third System

Historic Range

Random Chart
Calendar Spread

Level Table
Other Factors

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Uncertainty surrounds the ethanol industry which is highly politically charged. Government mandates are the key as to whether or not ethanol producers will be profitable or not, and currently many plants are idle or closed. There are so many scandals associated with Trump appointees especially as affects energy and environmental agencies, busily going about undoing the work of the previous adminstrations and rolling back regulations to help buddies in various oil and farming industries.

As long as uncertainty continues to exist in so many areas of vague policies of the current Administration, investors will likely pull back from any large scale increase for capital expenditures in ethanol production plants. Demand for ethanol is slackening in the U.S. Exports are diminishing. Coddling to farmers by allowing an E15 ethanol blend is not being readily accepted by auto manufacuters and drivers because of possible engine damage. Benefits to the environment from ethanol use are not being realized. Uncertainty shows up in our technical indicators to the extent we were forced to "break the tie" by double-weighting our assessment of the news.

Intermarket Analysis

We fed Ethanol, Crude Oil, and Gasoline into a neural network to get the following result:

Parabolic Chart

December Ethanol:

Parabolic Chart

Nirvana Chart

December Ethanol:

Initial Chart

News Analysis

Few stations are offering a 15% blend of etrhanol which the Republicans pushced to offer year round instead of just winter. In large population states station owners hesitate to retrofit pumps for fuel which many consider damaging to engines. But the midwest like Iowa, the fuel is accessible year round because the midwest has corn-producing states. What E15 is being sold may be stealing share from 10% blend gasoline. The number of stations offering E15 year round is below 2,000 nationally and mostly located in Minnesota and Iowa. The Repusblican (lousy) EPA is even streamlining warning labels to designed to prevent motorists from dispensing E15 into automobiles not authorized by manufacturers to use the fuel. Older cars can't handle it and boaters, bikers, and recreational vehicle owners complain that it negativelyi affects gasoline that's unused over time. New York State is trying to figure out ways to sell the fuel claiming 90% of vehicles there can tolerate it. E15 may be less affordable but claims higher octane which is supposed to be good for engines.

Testimony in a recent House committee on Environment and Climate Change focused on the U.S. EPA's mishandling of small refinery exemptions. Testimony claimed jobs were lost in rural America and green house gas emissions risen because of the exemptions. The EPA has never foillowed the Dept. of Energy's recommendations regarding SRE petitions. EPA has helped the oil industry at the expense of farmers and biofuel producers. Biofuel plants are being idled. SRE's given credit for starting an economic crisis. The U.S. currently has about 200 corn-based ethanol plants. The U.S. Energy Information Energy has projected declining demand for liquid transportation fuel in favor of electric vehicles. By 2022, biofuel use is projected to be lower than it is today.

Valero Energy Corp. reported a loss for its ethanol segment in the third quarter reported on Oct. 24th. But it had a profitable quarter for renewable diesel fuel.

Brazil recently amended an August 31st rule that raised the quota on U.S. ethanol imports under the tariff rate quota to 750 million liters per year. This was reduced to 600 million liters. The tariff rate quote in Brazil regulated how much ethanol can be imported into Brazil without triggering a 20% tariff.

Missorui's leglislature mandated the use of a 10% ethanol blend in all gasoline fuels sold within the state.

The EPA is scheduled to finalize the 2020 Renewable Fuel Standard in November. It would set the corn ethanol target at 15 billion gallons. The oil industry has threatened to sue over the proposals. The Renewable Fuels Association said 18 plants with a combined capacity of 1 billion gallons of ethanol per year have been idle or closed in the past year. U.S. ethanol consumption fell in 2018 for the first time in 22 years. The ethanol industry blames the waivers for small refineries.

There are conflicting reports and views as to whether or not the Renewable Fuel Standard thus far is a success or a failure. One problem is failure to meet goals because of limited production of advanced bio fuels. Some say corn starch ethanol may actually increase emissions. Production of cellulosic biofuels required to reduce emissions by at least 60% has fallen to at least 95% short of Congressional mandates. An EPA analyisis showed the RFS resulted in $1.6 to $3.5 billion higher fuel costs from 2014 to the present. Industry's rapid expansion has created a laundry list of higher costs for consumers and taxpayers. Those who claim the RFS is a success point out that the Government Accounting Office misunderstood the primary purpose of the RFS, which was to reduce American dependence upon foreign oil sources. The idea was to drive investment into renewable fuels. Overall it is claimed the RFS has reduced fuel pollutants by 34% compared to the use of straight gasoline.

President Trump has been under heavy political pressure to boost ethanol and biodielsel fuel use. A current plan is considered a step in the right direction by corn farmers and ethanol industry spokespeople. The previous two years have been bad for the industry blamed on decisions by Trump's EPA. The ethanol waivers granted to petroleum refineries in recent years are considered the weakest part of the plan. The trade war with China has also impacted the industry. The Administration granted 85 out of 99 waiver petitions in the past year. In 2013-2015, only 23 petitions were granted.

In 2018, Archer Daniels Midland Co. had an operating loss of $26 million in the second quarter of 2019, compared toi a $9 million profit in 2018. Negative margins in the ethanol industry and loiwer amounts of U.S. exports were responsible.

China will miss a deadline for enforcing mandatory use of ethanol-blended petroleum nationwide byi 2020, after backlash from energy firms and local governments thwarting Beijing's effort to clean up the envirionment. The policy failure has weighed on the price of corn there. That price has already been battered by African swine fever reducing feed demand. No local gas stations in one of China's northern provinces are providing ethanol-blended gas with the remark by one station owner, "Taiyuan isn't ready for E10."

EPA head Scott Pruitt was seen as about as swampy as any of Trump's apointees could get. He had many ethics scandals before resigning. The new head, Andrew Wheeler, may be even worse for the environment, as he was a former coal lobbyist. The agency has been on a course to deliberately undoi environmental regulations. Destruction of waterways and wetlands was on the EPA agenda drawing criticism from farming, mining, development and energy industries. Streams and wetlands would in many areas no longer enjoy protection under the Clean Water Act. The EPA is also trying to freeze tough vehicle standards in states like California. Wheeler inherits bad blood development between the EPA and corn interests. The EPA rolled back an OIbama era rule creating more strigent smog and ozone standards negatively affecting public health. Many populous blue states are suing the Federal Government to delay implementation of relaxed standards. Utah already isn't meeting the current ozone standard.

Our assessment of this news is that the Trump Administrationis trying to please both the oil industry and the corn farmers of the midwest but in a way which has resulted in plans described as "vague" and being challenged on many levels. Since markets abhor uncertainty, we think the oiverall news is negative for ethanol.

Point & Figure Chart

214.0I                                                                  T 10/29
     I CME - Dec-19 Ethanol, 29000 gal. c/gal.     Cm.=0.01  Lim.= 1.0
     I            X
     I            XO
     I            XO
     I            XO          X
     I        X   XO        X XO
     I        X   XO        XOXO
     IX       X X XOX       XOXO
     IXOXO    X XOXOX   X   X  O    X XOX
     I   O  XO O     OXOXO OX  OX XOXO OXO        XOXO
     I   O  X        O OX  O   OXOXO   O OX       XOXO
     I   OX X          OX      OXOX      OXO      XOXO  X
     I   OXOX          OX      O O       OXO      XOXOX XO
     I   OXO                             OXOX   X XOXOXOXO        X
     I   OX                              O OX X  OXO OXO O        XO
     I   O                                 OX X  OX  O   O        XOX
     I                                     O OX  O       O        XOXO
     I                                     O   O         O      XOXOXO
     I                                     O             O      XOXOXO
     I                                     O             O      XO OXO
     I                                     O             OX     X  O O  X
     I                                                   OXO  XOX    OX XOX
     I                                                   O O  XOX    OXOXOX
     I                                                     OX XOX    OXOXO
     I                                                     OXOXOX    OXO
     I                                                     OXO OX    OX
     I                                                     O   O     OX
     I                                                               OX
     I                                                               OX
             11111111                     111                          1111
The above chart is giving a conventional buy signal.

Cyclical and Seasonal Factors

We are headed toward a cyclical high and a weak seasonal up period.

Cyclicals Cyclicals Seasonals

Internal Program

Our best-performing internal program is "Trident". It is giving a buy signal.

Internal Printout 1 Internal Printout 2

Results of "Trident" for Ethanol (blue lines = successful trades, red, unsuccessful): (Not always in the market.)


Third System Confirmation

Our third system has triggered a sell signal. (Note, disregard the year on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)

Third System


The point value is $2,900. Initial margin on a single contract is $3,025. Use of options is advised.

Historic Range

Scale trade buyers are entering the market for the long term in this price range.

Historical Chart

Commitment of Traders

Commitment 1

In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Blue is small speculators. Red is large speculators. Green is commercials. Commercials with the best track record are getting increasingly-short.

Commitment 2

Interpretation of a Different Site Below (Their trader categories may vary from ours):
(This site has apparently not been adjusted for a move for the Ethanol contract from one exchange to another in May.)

Commitment 3

Volatility / Probable Range

FB 1 FB 2

The average volatility shown below suggests that an uptrend remains intact from the last volatility low point.

Range/Volatilitiy Chart

Possible Future Prices

Random Chart

Option Recommendation

Ethanol futures options are traded on the ICE Exchange under the symbol "XA", but it is so difficult to find a broker that offers them, and they are so thinly-traded, that we could not provide information. Ethanol futures options are also traded on the Chicago Mercantile Exchange (CME Group) under the sumbol "CT". Theoretical option prices are much better shown on the CME Group site than the lousy ICE site, but we would have to set up special programs to find best trades using data access conforming to CME's system. We may try to do this later, but for now it would be too time-consuming for just one commodity. Ethanol futues options trading is just not worth the trouble for us to figure out "trades" that would essentially have to be held to expiration in a thin market or to be executed rather than traded at this time, but we may try to figure out a computerized system for looking at all of them later.

Calendar Spread

What the Dec. - Feb. calendar spread suggests to us is that buying the near contract and selling the far one is at most times profitable, which we think is a sign that these futures may go up in the long run. The best time to enter or leave the above spread is when it is at -0.35 or narrower selling the far as prices are falling and then buying the near, and exiting or entering when it is at +1.45 or wider selling the near as prices are rising and then selling the near. At this time, we appear to be nearer the buy the far, sell the near point.

Level Table:

Level Table

The path of least resistance is down.

To view the chart below correctly use Microsoft Internet Explorer.

168.0|                                                                  T 10/29
 CME - Dec-19 Ethanol, 29000 gal. c/gal.     Cm.=0.01  Lim.= 1.0
118.0|-A-B-C-D-E-F-G-H-J-K-L-M-N-O-P-Q-R-S-T-U-V-W-X-Y-Z----|----|-- TPO= 0.446
       1 1 1 1 1                                       1 1           1
       1 1 1 2 2 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 8 9 9 0 0           0
       0 1 2 1 2 1 2 1 2 1 2 0 2 0 2 0 2 0 1 0 1 3 1 3 1 2           2
       1 4 9 3 8 4 8 1 6 2 6 9 4 8 2 6 0 5 9 2 6 0 6 0 4 8           9

Other Factors

Multiple Chart Indicators Summary
Multiple Chart Indicators Summary

Here's an intraday chart for a previous day ( 10/28 ).

Intraday Chart

Overall Recommendation

Decision Weighting Factors
FactorsWeighted Points
Inter-Market Analysis - 1
Parabolic Chart - 1
Nirvana Chart + 1
News - 2
Point & Figure + 1
Cyclicals + 1
Seasonals - 1
Internal System 1 + 1
Internal System 2 0
Third System - 1
Historic Range + 1
Commitment of Traders - 1
Range/Volatility + 1
Level Table - 1
Other Factors + 1
Total - 1
Place 4 December Ethanol on a Sell Watch with stoploss @ +4.04 above the get-in point when recent price is represented as "141.90".