By John DePutter & Dave Milne – March 24, 2020
“US ethanol producers are on track to shut about 2 billion gallons of annualized output by the end of this week.”Reuters, March 23, 2020
What it means:
It’s true that everyone must eat, including livestock, but declining demand from the ethanol industry is a huge blow for the corn market.
Monday’s futures action was instructive in just how big a challenge the weakening ethanol industry is for corn. While wheat futures surged in response to added demand for bread and pasta as North American consumers sheltered in their homes amid the covid-19 outbreak, corn ended little changed on the day. Soybeans were pulled sharply higher on ideas of increased soymeal demand, as the drop in ethanol output reduced the availability of dried distillers’ grains (DDGs) – a competing ingredient in livestock rations.
As all farmers know, the ethanol market is heavily influenced by crude oil prices. And, with crude oil falling to 18-year lows as planes are grounded and highways empty, ethanol prices have similarly fallen off a cliff. It stands to reason that, as the primary feedstock involved in its production, what’s bad for ethanol is bad for corn.
Ethanol a major US success story
Crude oil and ethanol have experienced rough times before, but this latest downturn is especially painful when you consider what an unmitigated success the American ethanol industry has been in terms of corn demand.
As shown on the chart below, the amount of corn used for ethanol production increased substantially between 2001 and 2010 – rising some 700% – as nearly all US gasoline was transitioned to 10% ethanol. The US currently blends close to 15 billion gallons of ethanol per year into the nation’s gasoline supply, with the production of this ethanol consuming roughly one-third of the total 2019-20 US corn supply.
It’s worth noting that, over the same period when corn for ethanol use was trending sharply higher, most of that additional demand was filled by a corresponding uptick in overall US corn production. Meanwhile, other demand sources, including corn for human consumption and animal feed, held relatively steady or even slightly declined.
Ethanol showdown a painful blow for corn
That’s why any sudden slowdown in ethanol demand is so painful for the corn market. In this case, the covid-19 pandemic was also a black swan event, so most people didn’t see it coming.
Sure, it was clear the volume of corn going to ethanol plants was leveling out. It was clear a lot of plants were working on thin margins. It was widely known that some were shuttering. However, this latest blow – involving unprecedented travel bans and fuel consumption cuts – almost nobody saw coming.
In 2019, farmers went to the fields and planted with ideas of normal demand for corn. As such, last year’s American corn planted area and production level assumed a mostly steady demand from ethanol. We now know that their production plans did not address our current reality.
Less usage of corn will lead to heavier ending stocks
The end result – depending on how long the pandemic continues and the extent of the damage it does to US gasoline and ethanol consumption – is of course the potential for significantly heavier 2019-20 US corn ending stocks than earlier expected. If that happens, corn futures will have trouble recovering significantly from their recent decline.
One possibility is that farmers slightly ease back on their corn acreage plans. It’s too late for a largescale shift out of corn, but some swing acres might yet get shifted to soybeans.
The Ag-Alert service offers commentaries on what this means for the corn market and the prices you can expect. Click here:
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