Possibly a bigger problem for refiners is that the price of corn continues to remain high bringing on the wrath of politicians and government leaders around the world who criticize the U.S. motor fuel industry for driving up global food costs. The high price of corn is also negatively impacting the profitability of ethanol refiners. The EIA prepared an analysis of ethanol refiner profitability at the end of August when the impact of high corn prices due to the drought was very topical. The EIA plotted the “corn crush spread,” which measures the price of ethanol minus the price of corn, against the front-month futures price for a bushel of corn.

As shown in Exhibit 2, when the impact of this summer's drought on the corn crop became evident, corn futures prices shot up from $5.50 per bushel to over $8. As that happened, the corn crush spread, which had been marginally profitable since last December, fell into negative territory. In early August, an ethanol refiner was losing nearly $0.30 per gallon if it ignored any money it might earn from selling the leftover feedstock and other by-products. Clearly, the corn price rise had hurt the profitability of ethanol refiners. Today, the corn crush spread is about a negative $0.31 per gallon, so the conditions that developed a few months ago have not changed. Without a boost in ethanol demand from a higher blending requirement, the mandated increase in ethanol output in 2013 will further pressure ethanol refiner profitability.

Eoin Treacy's view Corn prices pulled back sharply from the August peak to find at least short-term support in the region of the 200-day MA. They have been ranging between 725¢ and 775¢ for six weeks and found support at the lower boundary today. A sustained move below 700¢ would be required to confirm a medium-term top.

When one looks at the long-term inflation-adjusted chart, the trend is upward despite short to medium-term volatility. The removal of the corn ethanol mandate would represent a clear threat to this long-term bullish hypothesis.