By Michael Hirtzer and Cezary Podkul
CHICAGO/NEW YORK, March 14 (Reuters) - A winter-long traffic jam on U.S. railways is hampering transport of ethanol, forcing production cuts and ratcheting up prices in supply-deprived regions.
The coldest winter in three decades has stalled locomotives, frozen track switches and delayed crews, causing snarls in Chicago and other major hubs across the continent and slowing much of the eastbound ethanol trade.
It is a further sign of how this winter has put severe strain on U.S. energy production and transport. Deliveries of propane, natural gas, even electricity, have struggled to keep up amid the freezing temperatures.
East Coast stocks of fuel ethanol fell to their lowest level on record last week, down to 4.6 million barrels from 6.4 million at the same time last year, data from the U.S. Energy Information Administration showed on Wednesday.
Midwest ethanol producers - who often can store no more than 10 days’ worth of production on site - are finding their tanks full as railroad pick-ups slow.
As a result, some plants are reducing production. Wednesday’s EIA data showed the second-lowest weekly production for ethanol in the Midwest so far this year, at 802,000 barrels per day.
“We’ve had some times where we’ve had to make some adjustments in production,” said Brian Cahill, chief executive officer of Southwest Iowa Renewable Energy, which operates a 110 million gallon-per-year ethanol plant in Council Bluffs, Iowa.
Cahill said his company mitigates the issue somewhat by loading unit trains of 80 cars or more. But congestion in the country’s busiest rail hub of Chicago still slows transportation of the ethanol from the plant in western Iowa to the New York Harbor and elsewhere on the East Coast, he said.
It is unclear how long the congestion will last as the weather thaws and shippers work to erase the backlog of deliveries.
A spokeswoman for CSX Corp, which has experienced delays in Eastbound deliveries, said the railroad is working to relieve the congestion, but warned that “progress will be somewhat slow.”
BNSF Railway Co., which serves Midwest markets, said it is detouring rail traffic into St. Louis and Memphis for interchange with other railroads that serve the East Coast- an attempt at relieving congestion in Chicago.
The backup in traffic and production has proven a rare, if not lasting, boon for ethanol traders as prices rise.
East Coast blenders and exporters located far from the top producing Midwest region have been bidding up rail deliveries of ethanol. Even truck deliveries, which have increased as rail shipments slow, are making healthy premiums. Truck transport is typically less lucrative.
“The disparity was astronomically high between truck and rail markets,” said Jerrod Kitt, biofuels analyst at Chicago brokerage the Linn Group. “The truck market has caught up to the rail market but both are still making out like a bandit.”
As winter has dragged on, a yawning gap has opened between spot prices for New York Harbor ethanol and other major hubs. On Thursday, spot ethanol in the New York Harbor went for nearly $3.60 per gallon, versus about $3.20 in Houston and $2.60 in Chicago. Some traders have seen spot prices as high as $3.85 per gallon in recent weeks.
One trader said the Harbor prices are high enough that - if only on paper - they justify importing Brazilian ethanol.
“Anyone who’s been long ethanol has done fairly well,” another Harbor trader said. “It’s very difficult to say where we go from here.”
If ethanol futures are any indication, the market disparities are not likely to last much longer.
Fuel ethanol for April delivery cost $2.45 per gallon on the New York Mercantile Exchange on Friday, about $1 below the spot market.
“I think the market believes that this issue is going to unwind itself by then and we don’t have any reason to believe otherwise,” said Geoff Cooper, senior vice president of research for the Renewable Fuels Association, the ethanol industry trade group.
But beyond April, a larger question looms for the ethanol market. The typical winter slowdown gives markets a chance to build stocks ahead of the summer driving season, when rising gasoline demand leads to higher demand for ethanol blending.
“We didn’t have any chance to build stocks this quarter, which leads us into summer driving season much tighter than last year and much tighter than most times in history,” said Todd Becker, chief executive officer at Green Plains Renewable Energy Inc., an ethanol producer based in Omaha, Nebraska.
“Demand is just so robust,” he said.