10-12-2017: December Ethanol: Prospects Diminish in U.S. but Increase Worldwide

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Point & Figure

Internal Progrm
Third System

Historic Range

Random Chart
Calend Spread

Level Table
Other Factors


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5 Under the current administration, the U.S. has a bad record regarding its contributions to reducing environmental pollution, broken promises to farmers in places like Iowa, and an EPA "leadership" that is dismal in terms of advancing the cause of clean air. reducing acid rain, and basically in the pocket of the coal and oil lobbies. Is there any hope for ethanol? The answer lies in what the rest of the world is doing, and in particular, China, while the U.S. "sits on its ass" in regard to advancing similar mandates. China is not yet ahead of the U.S. in terms of creating stricter pollution standards, but it recognizes it has a bad problem in that area and is making progress at a much faster rate than the U.S. If we are not careful, emerging markets will overtake the U.S. in environmental standards, something we thought we would never see, and provide an export market for U.S. farmers and ethanol producers much faster than previously thought. Brazil does a good job of producing its own ethanol for stricter standards internal use, and U.S. has competitors for exports, and China is advancing but "isn't there yet."

We think new mandates coming out of Beijing are behind some ethanol price rise hopes, as it is much more expensive to buy ethanol in China that it is for the U.S. to ship it there, even with high tariffs. But the market just isn't there yet enough to counter the negative effects on air pollution and acid rain caused by the present Administration in this country.

Intermarket Analysis

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

Parabolic Chart

December Ethanol:

Parabolic Chart

Nirvana Chart

December Ethanol:

Initial Chart

News Analysis

The U.S. Grains Council (USGC) is working to develop ethanol markets in East Africa, which are accessible through the Persian Gulf. Meetings have been held with senior level officials in agriculture, energy, and environmental ministries as well as industry leadership. Kenya does not have a refinery but imports finished gasoline from the Persian Gulf. While some perliminary blending infrastructure exists in Kenya, it has gone unused because of restraints in domestic sugar production. Kenya has had a blend mandate since 2010 but it has not been met.

The U.S. American Coalition for Ethanol helps retailers to ask EPA to level the playing field for flexible fuel vehicles (FFV's). Specifically, the organization encourages EPA to restore incentives to automakers for the production of FFV's. This is critical in exports to European customers. The EPA has been taking away the FFV credit from automakers under the current administration, thus increasing greenhouse gas emission problems.

Our President does at least indicate that he understands that energy exports will create countless jobs for people in the U.S., and that homegrown U.S. ethanol can and must continue to play a substantial role in a growing dominance in energy products. The U.S. Renewable Fuel Standard (RFS) has caused a seismic level of growth over the past decade for the ethanol industry. Ethanol fuel production has grown from 6.5 billion gallons in 2007 to over 15 billion gallons in 2106.

China's state media said Beijing set the first timeline for ethanol use in cars. The push came to shittle down a massive corn stockpile. China currently has no nationwide ethanol mandate unlike the U.S. and Brazil. China's listed biofuel manufacturers' stocks rallied. The government there also said it has begun studying when to ban the production and sale of cars using traditional fuels. China has a very bad smog problem. If Republicans finally rebel and say in public what they are privately thinking about this Administration, there might be some hope, but we just don't seem to be there yet.

The USDA National Agricultural Statistics SErvice said that corn use for ethanol fuel was up in July, reaching 481 million bushels in August, up 6% from July and 5% from August 2016.

Even including a 30% import duty, offers of ethanol imports to China were heard at $540/metric tonne for November shipment while China's domestic prices were heard around $879/mt. Adding a 30% import duty and a 17% value added tax to U.S. exports of ethanol to China, the ultimate cost for U.S. ethanol would be $837/mt, still below China's domestic price. China's environmental inspection resulted in shutdown of some ethanol plants, tightening supply in the local markets there. A subsidy for domestic ethanol plants expired in July in China, further driving up prices there. Thus an aribtrage window for ethanol trading between U.S. and China is open.

The Internaional Energy Agency (IEA) is projecting increased demand for conventional biofuels. Sales of electric vehicles are increasing. But the share of EV's remains limited and biofuels are still expected to represent over 90% of renewable energy consumption in road transport by 2022. Biofuels production is expected to grow by 16% over that forecast period. Asia and Brazil are expected to lead the growth. Modest growth is expected in Europe and the USA. Major growth could rise to a total of 165,000 million liters by 2030 if the U.S., Canada, and Europe adopt a common E15 blending standard. An IEA report suggests an annual growth in production of conventional biofuels at 2.6%per year from 2017 onward.

Badger State Ethnaol LLC increased its ethanol production recently to over 90 million gallons per year at its Monroe facility, more than doubling its original nameplate capacity of 40 miollion gallons when the plant began production in 2002.

Senators Republican and Democrat from Minnesota and Iowa are leading a bipartisan group of 38 senators in calling for a strong Renewable Fuel Standard as the EPA works toward finalizing fuel volumes requirements for 2018. The EPA has been slashing previous compliance requirements by allowing export volumes to count toward compliance and cuting 2018 RFS volumes by as much as one quarter.

A recent scandal allowing Carl Ichan to make millions by advising the White House on cutting standards for the use of ethanol after Trump promised Iowans he'd help save the ethnaol industry. Ichan made investments shorting ethanol-related shares. EPA weighing Ichan's proposed rule changes drove down shares of ethanol producers including those of Pacific Ethanol Inc.

The Federal Government allows refineries to buy credits from companies that mix ethanol into gasoline if they don't meet standards otherwise. This offered opportunities for big banks, traders, and other financial institutions to buy and amass these credits by the millions in a new hot game on Wall Street. This has caused an ethanol price spike as speculators enter the picture. Big banks play down their involvement, stating that it is related to their ownership in companies that have interests in gasoline and other energy productgion and are therefore required to participate in the RFS program.

An attempt to pass an E15 bill that would allow 15 percent ethanol gasoline to be sold year-round was defeated in the Senate in July. The defeat was a victory for the oil industry and a defeat for the ethanol industry. E15 is currently available in only 29 states. Federal law restrictgs its sale between June and September. The rationale was that it would limit ozone production which causes smog during hot months.

We assess the news to say that the influence of the rest of the world on ethanol prices cannot outweigh diminished prospects under the Trump Administration for domestic use.

Point & Figure Chart

219.0I                                                                  T 10/10
     I CME - Dec-17 Ethanol, 29000 gal. c/gal.     Cm.=0.01  Lim.= 1.0
     I         X
     I       X XO
     I       X XO
     I       X X
     I       X X
     I       X X
     I       X X
     I     X X X
     I     XOX X
     I     XO OX
     I     X  O
     I     X
     I   X X
     I X XOX       X
     I XOXOX     X XO
     I XOXO      XOXO                                      X
     I XOX      OXOXOX                           X         XO
     I XO       OXO OXO          X               XO        XO        X
     IOX        OX  O OX         XOX             XO    X   XO        XO
     IOX        O     OX       X XOXO            XO    X X XO        XO
     IOX              OX       XOXOXO            XOX   X XOXOX       XO
     IOX              OXO      XOXOXO    XOXO  X XOXO  XOXO OXO  XO  XOX X XOX
     IOX                O    X X  OXO    XO OX XO   OXOXOX    OXOXOXOXOXOXOXOXO
     IOX                O  X XOX  O OXOXO   OX X    OX        O OX    OXO   O O
     IO                 O  XOXOX    OXOXO   OXOX    OX          OX    OX      O
     I                  OX XOXO     O O O   O OX    OX          O     O       O
     I                  OXOXOX          O     OX    OX                        O
     I                  OXOXOX                OX    O
     I                  OXOXO                 OX
     I                  OXO                   OX
     I                  O                     O
       11111111111111111                  11111       11111111
The above chart is giving a conventional sell signal.

Cyclical and Seasonal Factors

We are headed toward a cyclical high and a seasonal down period.

Cyclicals Cyclicals Seasonals

Internal Program

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

Internal Printout 1 Internal Printout 2

Results of "%R" for Ethanol (blue lines = successful trades, red, unsuccessful): (Always in the market.)


Third System Confirmation

Our third system is working on a long-term buy 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 $290. Initial margin on a single contract is $3,465. 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 vary from ours):

Commitment 3

Volatility / Probable Range

FB 1 FB 2

The average volatility shown below suggests that a change in major trend to up is imminent at a volatility low point.

Range/Volatilitiy Chart

Possible Future Prices

Random Chart

Option Recommendation

Our option trade recommendation is to Buy (1) Ethanol January 1.4 Call and Sell (1) Ethanol January 1.35 Call @ 0.027 to the sell side or greater.

o 1 o 2 o 3 0 4 o 5

Calendar Spread

What the Dec. - Jul. calendar spread suggests to us is that buying the near contract and selling the far one is at most times not profitable, which we think is a sign that these futures may go down in the long run. The best time to enter or leave the above spread is when it is at -2.00 or narrower buying the far as prices are rising and then selling the near, and exiting or entering when it is at -7.00 or wider selling the far as prices are falling and then buying the near. At this time, we appear to be midway headed toward the buy the near, sell the far point.

Level Table:

Level Table

The path of least resistance is down.
179.0|                                                                  T 10/10
 CME - Dec-17 Ethanol, 29000 gal. c/gal.     Cm.=0.01  Lim.= 1.0
     |Z[[   <<<
134.0|-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=-0.048
       1 1 1 1 1 1                                       1           1
       0 0 1 1 2 2 1 1 2 2 3 3 4 4 5 5 6 6 6 7 7 8 8 9 9 0           0
       1 2 0 2 0 2 0 2 0 2 0 2 0 1 0 1 0 1 2 1 2 1 2 1 2 0           1
       2 5 8 2 7 1 6 3 6 1 7 1 4 9 3 7 1 5 9 4 8 1 5 1 5 9           0

Other Factors

Multiple Chart Indicators Summary
Multiple Chart Indicators Summary

Here's an intraday chart for a previous day ( 10/11 ).

Intraday Chart

                 Risk Versus Opportunity Report

                  ACZ7    December Ethanol

                      High Price:  1.481
                   Current Price:  1.42
                       Low Price:  1.297

                            Risk: -0.088
                     Opportunity: -0.177

                    (O/R) Ratio =  2.016

Overall Recommendation

Decision Weighting Factors
FactorsWeighted Points
Inter-Market Analysis + 1
Parabolic Chart - 1
Nirvana Chart - 1
News - 1
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 - 3
Place 4 December Ethanol on a Sell Watch with stoploss @ +6.36 above the get-in point when a recent price is represented as "142.00".