What is the outlook for the ethanol industry going forward?
By KRISS NELSON
After a drop off in gasoline demand due to the lockdown of the country it appears there is some light at the end of the tunnel.
“Gasoline dropped to about five million barrels a day. Since then we have seen a pretty rapid recovery. We saw it come up to 7.4 million barrels a day last week,” said Todd Hubbs, agricultural economist at the University of Illinois. “It’s still a far cry from about 9.5 million barrels we normally see this time of year.”
With the drop of gasoline demand, ethanol production followed.
“We saw ethanol plants shutter and reduce production and we got down to 537,000 barrels a day a few weeks ago,” said Hubbs. “It picked up to 617,000 barrels a day in last week’s report and we expect it to go up again this week. I expect on the demand side for gasoline, we should see some support for more ethanol production as we move forward.”
An issue that many may think is not important, Hubbs said is ethanol exports.
“Ethanol exports through March were slightly above last year’s pace,” he said. “I would expect, and I think it’s fair to say, we are going to see numbers drop off dramatically into the summer before we see a recovery. A lot of our major export markets -Brazil, Canada, India -have been in some form of lock down and they’re still going through it.”
China is another potential factor that may help boost ethanol demand. But will they?
“There is always a lot of talk about China buying ag products and ethanol, in particular. They just bought a sparse amount,” he said. “This is an open invitation if they want to buy a couple million gallons -feel free. But I don’t think we are going to see that anytime soon.”
Hubbs’ April projections for corn use for ethanol was around 250 million bushels and he has hopes it will start building back up in May and that the worse is behind us.
“Overall we have seen corn use for ethanol just crater,” he said. “We got off to a strong start in 2020. We had good ethanol production, good corn use and this pandemic just ratcheted it down a lot. I think we may have seen the worst of it, barring some kind of rekindling of the pandemic.”
Scott Irwin, agriculture economist at the University of Illinois said that as the pandemic developed, ethanol prices took a dramatic drop.
“Ethanol prices literally fell out of bed to levels that really were unheard of and they literally dropped off the chart, dropping down as low as 60 or 70 cents per gallon,” he said. “We have seen in the last few weeks a recovery in gasoline usage. That pulled up ethanol prices along with it at least back up to a $1 a gallon.”
Irwin said it is important to recognize, however, that is still a wide margin and these are the lowest prices we have seen since 2007.
“We are still in the environment of very low ethanol prices,” he said.
As the pandemic began, came with it a lot of uncertainty and the market began sending signals that ethanol plants needed to be shut down.
With recovery prices back above $1 a gallon, we are now well above the shutdown price.
“It’s not surprising we are beginning to see some of those ethanol plants beginning to reopen and that is exactly the signal the market is sending,” said Irwin.
Corn price versus distillers dried grains
“Something interesting that happened as the pandemic developed is we saw some really spiking price reactions,” said Irwin. “The price of corn at Iowa ethanol plants, the price of corn on dollars per ton really dropped dramatically towards $100 per ton, where at the same time, the price of DDGs sky-rocketed to $200 a ton as livestock feeders started bidding up what was obviously going to be a reduced supply of DDGs as these ethanol plants shutdown.”
The price spike, Irwin said is way beyond anything we have ever seen historically, and although some price relationships are returning closer to normal, DDGs are still at a very historically high price.
“We will probably see that relative strength of DDGs continue until we see more ethanol plants reopen and the supply of DDGs return more to normal,” he said.
To add insult to injury, Irwin said the ethanol industry, prior to going into the pandemic, was already going through one of their worse periods of losses in the last dozen years.
“The pandemic was on top of what was already a very difficult period on average for the ethanol industry,” said Irwin.
There has been some consistency the last few weeks with net profits for ethanol plants, Irwin said, back into the positive territory.
“That is obviously going to have to continue to get the rest of the shuttered ethanol production in the U.S. back online in order to keep it online,” he said. “I expect at least for the next few months, we will likely see positive profits for ethanol plants as they reopen as the market has to incentivize them to get reopen.”
Eric Moseby, general manager with Lincolnland Agri-Energy said they have been focusing on weekly production and stocks reports as an indication of where the market’s headed and what the industry is doing.
“I think it’s going to be really interesting to watch how the ethanol industry responds throughout this recovery,” he said.
Regardless of how the recovery process goes, Moseby said he is hoping for a more measured and disciplined approach versus coming back online and blowing through those old production numbers and increasing stocks.
Moseby said at Lincolnland, they have been operating at a reduced rate since March.
“You could just see how the demand destruction was going to be very, very imminent,” he said. “So we slowed and that’s how we cope with things. We slow things and try to match our production to demand and cut costs as much as we possibly can and then see how that plays out and of course things change, literally things changed almost weekly throughout the last part of March through April and now we are starting to feel a little more stable as we start to see demand come back and customers starting to talk about what their needs are going to be for the next month.”
May, Moseby added looks to be the “low water mark” for production for Lincolnland, but are hopeful it will come back in June and into the summer as driving demand increases.
As far as Lincolnland, Moseby said they have coped fairly well through this pandemic.
“It is an initial shock to the economy of a plant when your prices are on a freefall – especially when you have inventories on the books. Then, there is always another side to that – recovery comes, so we try to look further out than just what the next few weeks are going to be and try to look at things at least quarterly and usually if you look at things quarterly, there is a little bit of light at the end of the tunnel,” he said.
Moseby said hand sanitizer production by ethanol plants can be described as a band-aid.
“It could be more than that if we could ramp up,” he said. “I know many plants are waiting on more clarification from FDA on what we’re allowed to produce and what we’re not allowed to produce. It’s a good thing. It shows our product is very useful. The ethanol molecule has a very important place in the marketplace. I’m glad that plants are able to produce that sanitizer.”
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