LDN - Business

Exclusive: Kinder Morgan to expand Chicago ethanol hub to calm price manipulation concerns - sources

[February 20, 2019] By Jarrett Renshaw

ORLANDO, Fla. (Reuters) - Kinder Morgan Inc will expand loading capacity at its ethanol terminal in Chicago to address producer concerns that trade at the terminal - a benchmark for global ethanol prices - is vulnerable to manipulation, three people briefed on the company's plans told Reuters.

Tens of thousands of barrels change hand at the hub every day, but many more barrels across the country depend on the price. Ethanol trade in the cash market at the Kinder Morgan Argo hub is used in contracts for the biofuel across the country, and is also baked into international contracts.

Trade at the terminal has come under scrutiny after one of the world's largest commodities merchants, Archer Daniels Midland Co, switched from its typical role as a buyer in late 2017 to a big seller, flooding the pricing hub with ethanol and helping drive the price to near record lows.

Farmers are struggling with a loss of export markets due to the U.S. trade war with China and mixed signals from the Trump administration on its support of the nation's biofuel laws. Plants have idled or shut altogether in recent months as U.S. ethanol prices have dropped below $1.20 a gallon, the lowest in about 13 years.

Kinder Morgan told traders at an industry conference in Orlando, Florida last week that it plans to at least double the amount of ethanol barges that can load and unload at its two existing Argo docks and it is exploring allowing a third petrochemical dock to also move ethanol, three sources briefed on the meetings told Reuters.

Kinder will also build a new 50,000 barrel-per-day storage tank at its Stony Island facility near Argo, the sources said. The Stony Island location loads and unloads ethanol trains.

The additions could be ready before the end of the year, traders said.

Kinder Morgan spokeswoman Lexey Long said the company declined to comment for the story.

The increased takeaway capacity will make it more difficult to drive up inventories at the 1.3 million barrel storage hub and drive down price, traders said.

"If you can send barrels in faster than you can take out, then you can drive down the price faster and for a longer period. This will help equalize that and level the playing field," said one ethanol trader.

Currently, Argo can unload roughly 120 to 150 tank cars of ethanol each week, or roughly 4 million gallons, and can load two barges, or roughly 1.2 million gallons, at a time. Train flows into the terminal fairly smoothly as tank cars can wait outside of Chicago before unloading, but bottlenecks at the slower-moving docks have significantly delayed trade at times, traders said.

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A gas pump selling E15, a gasoline with 15 percent of ethanol, is seen in Mason City, Iowa, United States, May 18, 2015. REUTERS/Jim Young/File Photo

In the past, Kinder Morgan has proposed expanding capacity but wanted producers and trading houses to help fund it through long-term contracts.

Not this time, traders said.

"I think they know people are upset and they want to make sure they retain their customer base," said another trader.

ADM's heavy selling prompted top U.S. ethanol producer POET LLC to ask the CME Group Inc to change the way it prices a key swap contract that is settled based on the cash market at Argo. Poet argued that the connection to Argo made the swap contracts prone to manipulation as well as the cash market.

ADM declined to comment on its commercial activity but said in a statement its "ethanol trading practices are proper and compliant with all laws and regulations."

The rival ICE exchange is contemplating offering an alternative to CME's product after discussions with frustrated biofuels companies, Reuters previously reported.

Argus Media met with a number of traders earlier this month in Houston to gauge interest in establishing a new cash benchmark that would rival the existing one set by S&P Global Platts, sources tell Reuters.

ADM can produce roughly 1.6 billion gallons of ethanol annually, about 10 percent of U.S. capacity. Despite its massive production, it has often been a buyer on the cash market to supplement its long-term supply deals or to support a market view, dealers said.

The Illinois-based global commodities powerhouse, a major ethanol producer, accounted for roughly 61 percent of the 9.5 million barrels sold at the Chicago hub between November and August of last year, according to the data reviewed by Reuters.

Late last year, the number went above 70 percent of the sales, Reuters reported.

Previously, ADM had been a regular buyer: In September and October of 2017, for example, ADM bought 810,000 barrels, 32 percent of the 2.495 million total trades in the Chicago hub during that stretch, according to the data.

(Reporting by Jarrett Renshaw; Editing by Simon Webb and Lisa Shumaker)

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