NEW YORK - Ethanol production credit prices tumbled six percent this week after trebling since June, with traders taking profits on the fear, though remote, that the U.S. government might relax the mandate in the face of a shrinking corn crop.
Renewable Identification Numbers (RINs), essentially credits that fuel companies use to prove they have satisfied the ethanol production mandate, surged this summer as a drought-stricken corn crop raised questions about whether ethanol producers would make enough fuel for oil companies to meet their quotas.
But this week they tumbled even as Chicago corn reached new records, with mounting pressure on the Obama Administration to relax or suspend the Renewable Fuels Standard that requires blenders to use more than 9 percent ethanol in their gasoline.
While most traders say they don't expect a waiver to be granted, it seemed time to take profits.
E12 RINs, referring to ethanol RINs produced in 2012, dropped 6 percent to trade at 4.70 cents a gallon after trading last week at 4.95 cents, traders said.
"I think it is the old sell-the-rumor thing going on," said one RINs trader. "Remember it is an election year."
RINs stands for Renewable Identification Number, a 38-character identifier given to every gallon of ethanol and renewable fuel produced in the United States.
This allows each gallon to be tracked to ensure compliance with the Renewable Fuel Standard Act by obligated parties such as refiners and blenders.
Obligated parties are able to buy or trade RINs to meet their quotas, which now is 10 percent of their gasoline production.
On Friday, the U.S. Department of Agriculture slashed corn crop estimates to the lowest level in six years, saying the corn crop will be 13 percent smaller than last year with a yield of 123.4 bushels per acre.
This puts corn yields for the 2012/2013 marketing year at the lowest since 1995, cutting back stockpiles to three weeks when the harvest begins in the fall.
Less corn will be used in making ethanol due the drought, said the USDA. It lowered its estimate by 8 percent for 2012/13, to 4.5 billion bushels, or 40 percent, the same proportion as this marketing year.
However, traders in the renewable fuel currency don't expect the U.S. government to issue a waiver to cut back use of the corn-based fuel as mandated by the 2007 Renewable Fuel Act despite the lowest corn crop in years.
In November, President Barack Obama, a supporter of ethanol, goes to the poll seeking second term. Some of the most fiercely contested states are in the farm belt, where the mandate is very popular.
"There are too many issues with plants that already have positions and hedges on with corn so it would be totally unfair to them," said one Chicago-based RINs trader.
The smaller crop pushed corn futures prices to a new high of $8.43 a bushel but conversely pushed E12 RINs, referring to ethanol RINs produced in 2012 to down to 4.60 cents a gallon, well below last week's level of 4.95 cents, traders said.
However, the price of RINs are still much higher than early July when E12 RINs were trading at 1.85 cents a gallon at the beginning of the drought.
A waiver of biofuel use by the EPA, petionable only by refiners, blenders and some legislators, would lower the amount of RINs needed to be bought by refiners to meet the Renewable Fuel Standard for 13.2 billion gallons a year in 2012.
The shrinking corn crop has livestock and poultry groups looking for support for a repeal of the use of the RFS as they vie with ethanol for a share of the dwindling corn market for animal feedstock.
Waiver or no, some experts feel one would make little difference for the 10 percent gasoline blending requirement as ethanol is now the octane enhancer of choice for clean air as mandated by the Clean Air Act.
Also, ethanol supplies are healthy, reaching a record levels of 22.5 million barrels in early spring ahead of the peak gasoline driving season. Inventories are currently hovering at 18.7 million barrels as weak profit margins have forced the temporary closure of some plants.
The purpose of RINs trading is to serve as a safety net for a situation like this, where a poor corn crop could put refiners and blenders in jeopardy of non-compliance with the Renewable Fuel Standard.
Refiners and blenders are also able to buy unused RINs from the previous year and the upcoming calendar year.
E11 RINs traded at its previous level of 55 points a gallon.
No trade was reported in E13 RINs but levels were pegged at 7.75/8.25 cents a gallon, below last week's trade of 8.25 points.
According to recent analyst estimates, nearly 3.5 billion gallons worth of 2011 RINs have not yet been used, of which about 2.6 billion are eligible for use against this year's 13.2 billion gallon renewable fuel target.
Trade in biomass-based diesel RINs, which can be used to satisfy requirements for advanced biofuels or renewable fuel, fell to as low as 1 cent a gallon late Wednesday before moving up to trade at 1.08 cent a gallon on Thursday.
Dealers said that biomass-diesel RINS trade and prices tend to drop off in the summer as the high demand period for biomass-diesel blending runs from October to March.
Advanced biodiesel RINs, D5, traded at 48 points a gallon, below the 52/54.5 points level seen in recent weeks.
Imports of sugar-based advanced biodiesel ethanol rose to 74,000 bpd from 9,000 bpd a week earlier, according to government data.
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