The News & What it Means – Ethanol production, corn demand permanently altered by pandemic?

By John DePutter & Dave Milne – June 9, 2020
The News:

“The CEO of an ethanol plant in southeast Minnesota is not convinced the rebound in ethanol production is sustainable.”

Brownfield, June 8, 2020
What it means:

The COVID-19 pandemic is changing a lot of things – the amount of corn going to ethanol processing included.

Farmers who have been around for a while will remember those graphics showing steadily increasing US ethanol production and corn for ethanol use between 2000 and 2011. Indeed, in that 11-year period, American ethanol production ballooned by more than 750%, to just under 14 billion gallons, with a commensurate increase in the annual corn grind.

Production has mostly leveled off since then, but ethanol was still accounting for between 35% and 40% of annual US corn usage up until crude oil took a spill early this year, followed by the pandemic.

A new normal

Now, we are looking at a whole different world.

As you know, to slow the COVID-19 spread, large portions of the worldwide economy were sidelined. People who normally commuted to work were suddenly forced to work from home, keeping their car in the driveway. The travel industry was decimated. Demand for crude oil tanked, culminating in that one terrible day in April when US oil futures plunged into negative territory for the first time ever, as sellers scrambled to dump the expiring May contract.

For ethanol, US production in late May slumped to its lowest level since the Energy Information Administration (EIA) began reporting ethanol production statistics in 2010. For its part, the USDA in April hacked its estimate of corn for ethanol use by 375 million bu from the previous month and then lowered it by another 100 million in May.

With those changes, old-crop corn for ethanol use now stands at an estimated 4.95 billion bu, down almost 8% from a year earlier and 12% from two years earlier.

In its first projections for the upcoming 2020-21 marketing year, the USDA estimated corn for ethanol use will rebound to 5.2 billion bu.

That’s a tall order. Admittedly, ethanol production has started to increase over the past number of weeks, as stay-at-home orders have been lifted and as crude oil recently touched a three-month high. However, that’s a tall order to fill. A bounce is easy to call for, but it’s far from certain that a bounce back to 5.2 billion bu will be achieved.

In 2018-19, when all cylinders were firing, the US corn grind tallied 5.38 billion bu.

Fragile recovery

It seems fair to say that the recovery to date is on shaky ground. First and foremost, COVID-19 is far from defeated. The virus is still circulating and several healthcare experts have warned it could return with a vengeance this fall. If that happens, fuel use could suffer another deep setback.

Meanwhile, the pandemic stay-at-home orders may well end up signaling a permanent change in how people work. Seeing an opportunity to cut back on pricey office space, companies may continue to keep their employees working from home long after the pandemic is over, slashing gasoline consumption. Fuel demand may also be permanently dented by such things as changes in airline travel that could see the elimination of budget operations which survived by packing as many people as possible onto every flight.

For ethanol, specifically, it is estimated that up to 73 US production plants were idled completely because of the pandemic-related loss in fuel demand, with another 71 sharply reducing operations. If all those operations suddenly come back online again at full capacity, overproduction and another collapse in ethanol margins would likely be the end result.

It’s a good bet that corn growers in the US – and in the smaller marketplace of Canada – will have to continue living with a less-robust demand side.

Not a death knell for the market, though…

The consumption loss from the ethanol downturn is serious, of course, but on the brighter side, it should be kept in context of total demand.

We are only looking at a loss of roughly 3% on the demand side of the US corn market when feed, seed, non-ethanol industrial use, food uses and exports are all considered. A couple weeks of hot, dry weather in Illinois and Iowa at pollination time can take just about as big a bite out of the supply side.

So remember, ethanol demand is just one component of the fundamental mix that will make or break the corn market this year.

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