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U.S. ethanol output rising as industry awaits new mandates

(Dave Bedard photo)

Reuters — U.S. ethanol production topped one million barrels per day for the first time last week, data showed Wednesday, ahead of a government deadline to issue a plan for the country’s hotly debated biofuels program.

The largest boost in production rates since May showed U.S. ethanol makers capitalizing on a recent uptick in profit margins, five traders and analysts said, as the industry awaited policy direction from the U.S. Environmental Protection Agency (EPA) expected on or by Nov. 30.

“It’s both a surprise and not a surprise. We were expecting production to cross one million (barrels per day) at some point, but we weren’t expecting it this week. The questions is: Can we maintain it?” said Jerrod Kitt, a biofuels analyst with the Linn Group, a Chicago brokerage.

Inventories of 19.63 million barrels were the highest since July as the jump in production outpaced demand, weekly U.S. government data showed, immediately sending lower ethanol futures traded in Chicago.

Biofuel makers have seen higher demand due to cheap oil prices that have increased driving in the U.S.

Still, profit margins are down year-to-date and the high production rates were seen as bearish for prices.

Kitt said exports will be critical, even as he expected ethanol to remain competitive and domestic demand to remain relatively strong.

U.S. ethanol exports through August were outpacing last year’s levels by five per cent, the most recent monthly Energy Information Administration (EIA) data showed.

The record run-rates could signal tough times ahead if fuel demand sees a seasonal slide this winter, threatening to push smaller and less efficient producers to the sidelines.

“Margins aren’t great, (but) we haven’t incentivized anyone to slow down yet,” said a U.S. trader.

The biofuels industry has said that policy uncertainty and regulatory delays are behind the industry’s struggles, deterring investment and raising questions over demand.

The groups have pressed President Barack Obama to rethink the EPA’s May proposal for biofuels requirements well below a 2007 plan laid out by Congress that has drawn criticism from oil companies, renewable fuels makers and environmentalists.

A sign of industry woes, Spain’s Abengoa said it started insolvency proceedings after a financing deal fell through, sending shares down as much as 69 per cent.

The company owns six bioethanol plants in the U.S.

Traders have said at least two of Abengoa’s corn ethanol plants have been idled. A company official did not respond to request for comment.

Reporting for Reuters by Chris Prentice in New York and Michael Hirtzer in Chicago.

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