US ethanol output at 2-year low as drought bites

Published in Reuters

July 18 (Reuters) - The worst U.S. drought in over 50 years has shriveled crops, forced the culling of livestock herds, and slowed ethanol production, putting more pressure on a biofuel industry already reeling from high corn prices and poor margins.

Ethanol production last week fell to the lowest level since the U.S. government began tracking the data in June 2010 because the oppressive heat prompted plants to run at reduced rates.

Excessively high temperatures make it more difficult and time consuming to cool the water used in ethanol production.

"Ethanol plants don't like heat and some of them aren't equipped to handle excessive heat. It reduces efficiency and some of them were even reporting electrical issues," said Jerrod Kitt, analyst with the Linn Group in Chicago.

"The heat really impacted things after margins got the ball rolling.

Ethanol's been in negative margins for the last six or seven months so there's just no incentive to produce more and it's tough to get corn," he said.

Ethanol plants, already squeezed by drought-bloated prices for their prime feedstock, are struggling to produce the corn-based biofuel efficiently under the oppressive heat that has plagued much of the central United States over the past month.

U.S. ethanol output fell 2.3 percent last week to its lowest level since the government began publishing the data in June 2010 and analysts said the heat deserved part of the blame.

Chicago Board of Trade corn futures have flirted with all-time highs this month as the most expansive U.S. drought since 1956 withered crops and eroded yields in the heart of the U.S. farm belt.

The drought was expected to expand and grow more severe as there was little rain in the near term forecast and temperatures, which have shattered records across the Midwest this summer, were seen remaining high.

Ethanol production slipped for a fifth straight week, dropping to 802,000 barrels per day, down 19,000 bpd, in the week ended July 13, according to Energy Information Administration data on Wednesday.

Ethanol stocks rose by 24,000 barrels to 19.56 million barrels, boosted by steady imports and a slightly decline in blending rates from historically high levels.

At least three ethanol plants -- two in Nebraska and one in Indiana -- were idle due to rising corn prices and negative profit margins and some others have curtailed production.