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Let's Talk about Ethanol for a second

Today's "Morning Shift" included some hate towards corn. I love corn because it makes me think of summer. But the topic was corn being used to make ethanol for blending with gas...a touchy subject depending upon where you live. Departing from my usual know-nothing-about-cars-but-let's-post-a-gif-to-remain-relevant style, I actually dropped a little knowledge!

A couple responses later and I realized that I had a little insight that I could share with you guys and maybe expand some understanding, including my own.

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Quick overview of my qualifications here: I love cars and engines but have no idea (translation, enthusiast) and would love to get into the auto industry. I currently work in supply chain management for fuel (trading, shipping, hedging, etc.) to a handful of companies around the country that have fuel stations. It's a small team with a handful of customers but I've learned a helluva lot in my short time in this role.

This is a quick chart of ethanol values (per gallon) trading on the Chicago Index. Why Chicago? I honestly don't know but that is the index of choice for much of the country. There's also NY Harbor but that market is even more insane. But back to Chicago...

You could but a gallon of ethanol out of Chicago in January for under $2.00 (low of $1.78) and then in March that same gallon was $3.76. On blended gallons, that's roughly 20 cents tacked onto the price of gas. Gas prices go up during this time of year already, courtesy of the RVP change for summer gas, but the reason you haven't seen crazy high prices at the pump is that there hasn't been a run this year on gas...market is acting strange everywhere (but that's a whole different story).

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What caused this dramatic price run and fluctuations (yesterday's Chicago ethanol was $2.45 so it's settling back to normal levels)? The issue was apparently a rail car shortage.

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Yes. Rail cars.

Believe it or not, much of the ethanol in the country is railed into terminals. This makes sense as a convoy of rail cars can carry exponentially more than a single truck. If you Google "Rail Car Shortage" you will get all sorts of hits across multiple markets but bottom line is this winter really messed things up with rail cars...other factors exist but I don't know them nor do I care enough to speculate. Bottom line is, ethanol skyrocketed because you just couldn't get any.

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Commenter Gabest raised an interesting question regarding location in the country in regards to ethanol cost. Why is Iowa paying a Chicago price if you basically get corn produced ethanol from Iowa? Why does Georgia get that Chicago price? Why is it uniform? (these questions were mine here for the sake of asking, he was much focused on Iowa)

It is a good question and a great topic for discussion!

The Chicago Ethanol Index is used as a base for contracts and deals. Where parts of the country may be tougher to get ethanol to other parts are relatively easy. What we see then is the Chicago Ethanol Index plus or minus a differential (cents per gallon). It all depends upon where the ethanol plants are, where they are sending ethanol to, what their costs are, how the market is sitting and how badly they need to get rid of product. So some areas like the Southeast US may have ethanol deals made at Chicago Ethanol plus .20 to .50. Then, in Iowa, the deals look like Chicago Ethanol MINUS .05 to .10! That is a .25 to .60 swing per gallon of ethanol which equates to roughly a 2.5 to 6 cent difference in your blended gallon price at the pump.

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A wild card in the ethanol game is something called a RIN, or renewable identification number. Basically, for every gallon of ethanol produced there is a number associated with that gallon. The number is attached to that gallon up until it is blended with gas to form an e10 blend. At that point, the number is released and whoever blended it gets to keep it. Why is this important? Because the ethanol producers are required to send the EPA a RIN for every gallon of ethanol they produced. There is a mandate that states how many gallons of ethanol need to be blended each year and when ethanol is not being blended at a rate high enough to cover the mandate, there is a shortage of RINs on the market. This has ethanol producers scrambling to buy up RINs from anyone with excess, making RINs valuable.

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RINs used to be worthless (highs of $.06). Last year...they were trading, in July, at $1.46 each. It threw the market out of whack because nobody knew how to take the RIN value into consideration when selling a blended gallon of gas. One gallon of ethanol had an additional value now! Basically, if I get a RIN worth $.45 and you don't but we have the same cost into the market I can price my gas cheaper than you by up to 4.5 cents. The market has since adjusted but RINs still play a part in market prices i until the EPA mandate makes sense.

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This picture is just funny.

Many people do not like e10 blends and preach the benefits of conventional gas...no blending. Some people don't have an argument while others point out that ethanol's higher octane gives you 3-5% less fuel efficiency when comparing an e10 gallon to a conventional gallon. Does it all make sense? I don't know. Is my rambling helpful? If you piece it together, maybe. I hope some of this makes sense and starts some more discussion. I've learned a lot from OPPO and will do my best to answer any questions you may have.

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THE MORE YOU KNOW!

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