Grains are cheap, crude oil is expensive--how to position?

My attention drifted from the various wheat futures today while I pursued a trade based on the "relative value" posts below. There are many links in the relative value chain from wheat to corn to ethanol to gasoline to crude oil. All the links involve variations which can persist for many months at a time. Some of the links involve other commodities; sugar prices (as a competing source) can impact ethanol as can natural gas (as an input cost).

My analysis led me to a trade buying ethanol vs selling gasoline. Any "pull" on the grain markets from energy markets could be reflected in higher ethanol production margins as that demand is transmitted via ethanol, so I didn't want to own the grains themselves. Likewise, I wanted to short the gasoline for which ethanol would substitute and not take on further gasoline refining margin risk by shorting the underlying crude.

At just over 70% of gasoline in $/gallon, ethanol is just about economic even without the 45 cent/gallon blenders' tax credit--but there is a tax credit, so it is very attractive to blend with gasoline here. And by June the Obama administration will release their report on raising ethanol blending to 15% from 10%. This trade could go wrong by 5%, but not by 10% unless there is a panicky spike in gasoline. Gasoline inventories are slightly above 5 year averages and vehicle miles dropped year over year in the most recent report, so the panic would have to come from outside the domestic gasoline market.

On the upside, we could see a 10-15% rise in ethanol prices with corn prices constant as ethanol moves toward economic parity with gasoline (inclusive of the tax credit). There is enough room in variation in ethanol refining margins to allow that kind of move from current levels. Or we could see corn move up on weather. Or we could see gasoline fall as the economic outlook (or the S&P500's approximation of the economic outlook) turns down.

If this trade goes wrong, we will exit pretty quickly; if it goes right, we will try to hang on for a significant move.