By Dave Milne and John DePutter – August 28, 2019
What it means:
This is a story that represents something deeper and bigger: Reduced usage for corn to make ethanol is having a serious negative impact on corn demand.
Some of the reduced usage, although not all of it, is due to U.S. government policies.
Perhaps because it has been largely overshadowed by the larger and more severe impact of the ongoing trade war with China – the harm being caused by the U.S. Environmental Protection Agency’s increased granting of small refinery exemptions has flown under the radar to some extent.
But looking deeper into a complex issue reveals very real corn demand destruction.
How it works:
Refineries are getting out of their obligations to blend ethanol
Under EPA’s Renewable Fuel Standard (RFS) program – which legislates the volume of biofuels which must be blended into the nation’s total fuel supply – a small oil refinery may seek relief from its blend obligation if it can demonstrate that compliance would cause the refinery to suffer “disproportionate economic hardship.” Once it receives such a submission, the EPA evaluates it to determine whether an exemption may be granted, based on information presented by the petitioning refinery and on the statutory and regulatory requirements for exemption.
Between 2013 and 2015, the EPA only received between 13 and 16 such petitions annually, with roughly half of them being rejected. However, the number of petitions in 2016 jumped to 20, with almost all of them (19) ultimately being approved. In 2017, 35 out of 37 petitions were accepted and for 2018, a further 31 of 42 petitions were approved.
It’s easy to see the trend here: the number of exemptions is rising, with the biggest increases coming under the watch of current U.S. President Donald Trump.
The latest round of approvals (for 2018) were just announced earlier this month, with the estimated volume of gasoline and diesel exempted at 13,420 million gallons.
With fewer and fewer refineries utilizing government-mandated ethanol, the result is obvious: less ethanol is being used; less corn is needed.
It’s affecting corn prices and may keep doing so.
The amount of price pressure this is causing is hard to measure, but it’s definitely a negative factor…
American biofuel and corn associations are sounding the alarm, suggesting the Trump Administration is coddling up to the oil industry – a fierce biofuel opponent – and undermining the ethanol industry which is responsible for about 40% of annual U.S. corn usage.
As can be seen by the chart here, the USDA’s 2018-19 corn for ethanol demand estimates have trended lower over the past number of months, declining from a forecast of 5.6 billion in November, 2018 down to 5.4 billion in August, 2019. That’s a drop of only 4% in the forecast over nine months, so you might not think it’s severe.
But consider this: The reduction in the forecast actually amounts to a lot: 225 million bu. That’s roughly equivalent to the entire Michigan corn crop!
Looking at it in another way, the impact is even greater: According to the Iowa Corn Growers Association, the EPA exemptions over the past the number of years to small refineries have effectively destroyed more than 2.61 billion gallons of ethanol demand resulting in the destruction of nearly 1 billion bu of corn demand in a two year period.
Clearly, ethanol consumption is turning down. Total U.S. consumption in 2018 was nearly 300 million gallons below the level forecast by the EIA at the start of the year and more than 100 million below 2017.
Key point: 2018 actually marked the first year-over-year decline in consumption in more than 20 years, the Missouri-based Renewal Fuels Association (RFA) reported.
As ethanol demand has softened, ethanol prices have fallen and profit margins have turned negative for ethanol processors.
Since the first quarter of 2018—when EPA began to massively expand small refinery exemptions—at least 15 ethanol plants have idled production or permanently closed, according to the RFA.
Low prices tend to cause less production and more consumption. And the low-priced ethanol market will eventually function to do that, to some degree. But this is not an open, free market. It is a market complicated by government policies.
There are signs the Trump administration may modify its approach to soften the downturn in ethanol prices or level it out. Even so, there’s no clear end is in sight to the concerning trend for corn demand.
In the meantime, the bottom line is this:
It is safe to assume that a great 20-year demand upswing for corn supported by ethanol industry growth is over.
Trading near three-month lows, not all of the recent weakness in corn futures can be attributed to sliding ethanol demand – the USDA’s surprisingly high 2019 production estimate released Aug. 12 has been the main factor in corn’s decline – but it’s still a bearish influence regardless, and one the Ag-Alert team will be keeping an eye on.
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