Ethanol prices hit all-time low, unconfirmed reports of plant shutdowns
DES MOINES, Iowa -- Corn demand by the U.S. ethanol oil industry could drop by 120 to 170 million bushels during the next two months if gasoline consumption – and the ethanol blended with it – continues to decrease as expected.
That’s according to Todd Hubbs of the Department of Agricultural and Consumer Economics at the University of Illinois. In an analysis posted March 16 on the farmdocdaily website, Hubbs wrote that an estimated 15% to 20% reduction in gasoline consumption that is expected by many industry analysts in the next couple of months will lead to a decrease in demand for corn to make ethanol.
“If gasoline consumption falls by the expected amounts over the next two months, corn used for ethanol production may lose 120 to 170 million bushels,” Hobbs wrote. “A continuation of reduced economic activity for an extended period will only exacerbate the demand loss. If the U.S. economy can recover, strong ethanol use looks likely as we move into the final months of the marketing year. Over the short run, the reduced consumption of corn used for ethanol places an added emphasis on export markets for corn prices.”
The downturn in demand for ethanol, which is blended at a 10% rate in almost every gallon of gasoline consumed in the U.S., is coming at a time when ethanol plants were already economically challenged by the Small Refinery Exemptions granted by the Trump administration’s EPA and by the loss of the Chinese ethanol export market because of the trade war against the Chinese being waged by the Trump administration.
Jim Burkhard, vice president and head of oil markets HIS Markit Watch, said the plunge in gasoline prices and the resulting drop in ethanol prices are setting records. “On Monday (March 16), the nearby gasoline price dropped by 21¢ per gallon, falling to 70¢ per gallon,” Burkhard wrote. “This is now at the lowest price since November 2002. Ethanol prices fell to new all-time lows on Monday, falling 16¢ per gallon to $1.03 per gallon. It is unusual to see ethanol trading at a 33¢-per-gallon premium to gasoline, rather than a 30¢ discount.”
Crush margins at ethanol plants have declined to -22.7¢ a gallon according the S&P Global Platts, the lowest level since Platts began tracking the margin in 2016. “Sinking margins have spurred speculation that some ethanol plants will have to shut down, with one source calling it ‘inevitable,’ ” Platts reported.
No plant closings had been announced as of the close of business Tuesday, March 17, but sources contacted by Successful Farming magazine confirmed that plants are being idled because of financial concerns.
Steve Roe, general manager of Little Sioux Corn Processors, LLP in Marcus, Iowa, said the drop in the demand for ethanol and the resulting low prices are undermining many ethanol plants’ financial strength at a time when the plants were already hurting.
Roe said he has heard of plants that have shut down or that didn’t go online after a shutdown for routine maintenance. He declined to say what plants have halted production. “We’re seriously underwater (financially) and everybody is in the same boat,” Roe stated. “We’ve had burdensome ethanol stocks hanging over our head and, with the decline in oil price, ethanol prices are down, as well. Demand also is worrisome with some people saying demand will be reduced 40%. If that is true, we’ll run out of space to store the ethanol, and we’ll be forced to reduce our production rates, whether we want to or not.”
When plants cut production, he said, that inevitably leads to a downturn in demand for corn.
Monte Shaw, executive director of the Iowa Renewable Fuels Association, said he wasn’t aware of any ethanol plant shutdowns, but he added that the ethanol industry was under a great deal of financial pressure.
“It’s a difficult time,” said Shaw. “There’s obviously a great deal of concern now. Ethanol plant margins are horrible and demand is expected to go down. For two years, ethanol plants have not been building up their cash reserves so they aren’t entering this latest challenge with a lot of cash reserves. It’s kind of frightening.”
Shaw said the Iowa Renewable Fuels Association office in Johnston, Iowa, has been shut because of fears about spreading the new coronavirus and the disease it causes, COVID-19, and that he and the three other employees of the association are working from home.
Uncertainty because of the coronavirus is having a negative impact on ethanol plants, he said. “The ethanol industry has been through the one-two punch of Small Refinery Exemptions and the loss of the Chinese export market, and now it’s a one-two-three punch with the coronavirus,” Shaw noted. “That’s a lot of punches, and we haven’t had a chance to take a breath.”
Shaw said the president and members of Congress have been talking about financial aid for the oil industry. “We are 10% of every gallon of gasoline sold, so they certainly need to start thinking about what they can do to help the renewable fuels industry.”
There has been some talk about potential assistance for renewable fuels, Shaw stated, but he doesn’t expect any concrete proposals for a couple of weeks. “We’ve had some discussions with the Iowa Congressional delegation asking them to do something for us if something is done for the petroleum industry,” he commented. “We’ve started vetting some ideas, but there is nothing specific yet. We also are working with other state-level trade groups. At some time in the not-too-distant future, we want to get some ideas in the pipeline.”
One thing that needs to be discussed is helping ethanol plants maintain their workforce, Shaw said. “Plants need to pay their employees or they will go away and this is a skilled workforce that isn’t easily replaced,” he stated. “Plants sometimes run longer than they should because they don’t want to lose their skilled employees.”
Geoff Cooper, president and CEO of the Renewable Fuels Association, a Washington, D.C.-based ethanol advocacy organization, called on the Trump administration to take immediate action to prevent widespread shutdowns of ethanol plants. “Our industry is being adversely affected not only by the economic constraints caused by the coronavirus, but also by the oil price war, ongoing trade disputes, and EPA’s small refinery waivers,” Cooper said in a statement issued Monday, March 16.
“While the policy response to turbulence in the energy markets has so far focused largely on supporting crude oil producers, we urge the administration to recognize that biofuel and agricultural commodity markets are suffering as well,” the statement continued. “Ethanol futures prices hit a record low in recent days, as the coronavirus is expected to negatively impact domestic and international fuel demand in the near term. With many ethanol plants on the verge of shutting down, we implore the Trump administration to take action that equitably supports all liquid fuel industries – including ethanol producers – during this time of unprecedented market uncertainty and unrest,” Cooper stated.
Trump should announce that his EPA will not appeal the recent 10th Circuit Court decision on small refinery waivers, Cooper declared, and should also announce that EPA will implement the 500-million-gallon remand as ordered by the D.C. Circuit Court in 2017. “Given the robust financial assistance the Trump administration is planning to provide to oil producers, immediate actions to ensure EPA abides by these court decisions can help soothe concerns among those whose livelihoods depend on agriculture and renewable fuels,” Cooper added.
Emily Skor, CEO of Growth Energy, another D.C.-based ethanol group, called the latest financial crisis affecting the ethanol industry “unlike anything we’ve seen before. Biofuel producers are under desperate strain. Between fuel demand dropping, government uncertainty from refinery exemptions, and an expected economic downturn driven by the coronavirus – a vast number of plants are operating in the red right now … (T)he next two months will continue to be challenging as a result.”
Steve Roe, the general manager of Little Sioux Corn Processors, tried to be optimistic in the face of the economic calamity facing the ethanol industry. “It’s got to get better,” Roe stated. “It can’t hit us any harder, I think. I have full faith the ethanol industry is going to come out of this.”
Brazil’s ethanol industry also has been hit hard economically by the downturn in oil prices, according to published reports, with the country’s corn-based ethanol plants especially hard hit.