Oil and Gas

Midwest floods hammer US ethanol industry, push some gas prices toward five-year high

Key Points
  • The March floods that punished the U.S. Midwest have roiled the ethanol industry.
  • The flooding has hammered prices and trapped barrels in the country's interior while the U.S. coasts suffer from shortages of the biofuel.
  • The floods inflicted billions of dollars in damage to crops and homes in the U.S. Midwest, and knocked out roughly 13 percent of ethanol capacity.

The March floods that punished the U.S. Midwest have roiled the ethanol industry, hammering prices and trapping barrels in the country's interior while the U.S. coasts suffer from shortages of the biofuel.

The historic March floods have dealt a series of blows to large swaths of an ethanol industry that was already struggling with high inventories and sluggish domestic demand growth. And the ethanol shortages are one factor pushing gasoline prices in Los Angeles and Southern California to the highest in the nation and they could top $4 a gallon for the first time since 2014, according to tracking firm GasBuddy.

Benchmark price for ethanol used in most supply contracts initially jumped on news of the floods but has been hobbled by rising waters around the Chicago hub that have halted barges and sales. That stands in contrast to prices on the coasts, which rose dramatically - drawing in heavy imports from Brazil, the main U.S. ethanol competitor.

The floods inflicted billions of dollars in damage to crops and homes in the U.S. Midwest, and knocked out roughly 13 percent of ethanol capacity.

Homes and businesses are surrounded by floodwater on March 20, 2019 in Hamburg, Iowa.
Scott Olson | Getty Images News | Getty Images

U.S. ethanol is made from corn and required by the government to be blended into the nation's fuel supply to reduce emissions.

While some ethanol plants were flooded, the primary effect of the rising waters was to shut rail lines that serve as the main arteries for corn and ethanol deliveries.

Ethanol prices on the coasts spiked due to shortages, but Midwest producers have been unable to take advantage because of washed-out rail lines, market sources told Reuters.

"Unfortunately for anyone who was impacted by logistics issues it was a double whammy. You couldn't capture the rally," said one trader.

At Chicago's Argo terminal, the nation's main ethanol pricing hub, the cash price for ethanol fell for an eighth straight session last week to $1.29 a gallon, the longest downward skid since April of last year, according to Oil Price Information Service, which does daily assessments.

Initially, fears of widespread plant outages boosted that benchmark, but plants proved more resilient than expected, continuing to produce despite logistical challenges.

While some ethanol plants were flooded, the primary effect of the rising waters was to shut rail lines that serve as the main arteries for corn and ethanol deliveries.

Ethanol prices on the coasts spiked due to shortages, but Midwest producers have been unable to take advantage because of washed-out rail lines, market sources told Reuters.

"Unfortunately for anyone who was impacted by logistics issues it was a double whammy. You couldn't capture the rally," said one trader.

At least one county in California has already surpassed $4 a gallon. The highest recorded average price for the state was $4.67 a gallon, in October 2012, according to AAA.

The high coastal prices attracted barrels from the biggest U.S. competitor: Brazil. Overall ethanol imports to the United States totaled 558,279 barrels in March, the most seasonally since 2013, according to Refinitiv Eikon ship tracking data. Most of the imports during the month came from Brazil, according to the tracking data.

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