Refiners and wholesalers have enjoyed a few good years of adding extra profit margin to each gallon of gasoline sold by simply blending conventional 87 octane gas with ethanol. Things have quickly changed over the last few months with sky rocketing corn prices shrinking blending profit margins dramatically.
The blending economics do not appear to be improving anytime soon. The 2010 US corn crop yield projection was trimmed again on Friday, sending corn futures to a yearly high trading above $5. This has widened the backwardation of ethanol futures sending the near month CBOT to 2.14, making it on average .15 higher than conventional 87 octane spot.
To make matters even worse, congress is under pressure to do away completely with current biofuel blending credits. The credit is just large enough at today's ethanol prices to make blending slightly profitable.
With wheat prices soaring, farmers will be incentivized to plant more wheat next year than corn, all but ensuring a lower supply of corn for next year. Fuel wholesalers not needing to be in the ethanol blending business should exit now, or at least as soon as contractual storage obligations permit.
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