On Tuesday, we posted about news from the Bismarck Tribune: North Dakota oil industry gets roughed up by brutally low petroleum prices.
That news made us wonder how crashing oil prices and the dismissed demand for gasoline might affect the renewable fuels industry, aka ethanol.
While we're waiting to hear back from the Minnesota Department of Agriculture for specific, accurate information about Minnesota's ethanol concerns, the news in the ag press and regional media doesn't seem like the Saudi-Russian spat and coronavirus pandemic are good news for corn growers.
At Successful Farming, Jerry Perkins reported Tuesday in Ethanol prices hit all-time low, unconfirmed reports of plant shutdowns: Corn used for ethanol production may lose 120 to 170 million bushels, economist says:
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.
In Corn Demand over the Near Term, Todd Hubbs writes:
The sharp price drops across equity and commodity markets over recent trading sessions indicate investors foresee a drop off in economic activity over the near term. Only the duration and severity of the economic contraction remain uncertain. A severe contraction extending into the summer does not bode well for agricultural commodity prices. Corn demand will suffer over the short run with corn used for ethanol setting up for particular weakness.
The wave of cancellations in response to the pandemic in the U.S. continue to pile up. An increase in canceled trips and reduced commuting in major metropolitan areas points toward a severe reduction in gasoline consumption. Estimates of a 15-20 percent reduction in gasoline use seem to be the expectation for many industry analysts over the next couple of months. While weekly estimates of ethanol production continue to show more than a million barrels a day through March 6, the prospect of reduced ethanol production looks certain. If gasoline consumption falls by the expected amounts over the next two months, corn used for ethanol production may lose 120 – 170 million bushels. A continuation of reduced economic activity for an extended period will only exacerbate the demand loss. The price war between Saudi Arabia and Russia in the oil market saw gasoline prices fall and appears set to continue into the summer driving season. 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.
Low corn prices helped pick up export sales over the last couple of weeks. The export sales for the week ending March 5 indicated 57.9 million bushels of net sales. Since the report, an additional 22.9 million bushels of sales came through the export sales reporting system. Using weekly export inspection and Census data, corn exports through March 12 totaled 669 million bushels. Exports need to average 42.9 million bushels per week for the remainder of the marketing year to hit the USDA forecast. The pace of exports still lags USDA’s 1.725 billion bushel forecast. The potential to reach the forecast requires an expansion of export sales. While U.S. exports still face competition from the Ukraine, buying out of South Korea and Japan hint at a continuation of corn sales over the near term. As China and other Asian nations emerge from the controls put in place during the coronavirus spread, an expectation of more robust exports appears plausible. The eventual size of Brazil’s second corn crop looks to be crucial for corn exports this summer.
USDA projections for corn production in the 2019-20 marketing year stayed at 5.94 billion bushels for Brazil and Argentina. Brazil’s forecast production sits at 3.98 billion bushels. Forecasts for the second corn crop in Brazil currently sit near 2.88 billion bushels. The Brazilian corn supply situation remains tight. The expansion of livestock production in Brazil to meet Chinese demand places corn prices up significantly from last year. A substantial amount of the second crop in Parana, the second-largest corn region in Brazil, will go in outside the ideal planting window. Forecasts of dryness in the region require monitoring as the critical months of April and May arrive. A short crop in Brazil would pull down world supply and provide reduced export competition this summer for U.S. corn.
The current USDA projection for feed and residual use sits at 5.525 billion bushels. First-quarter use estimates indicated 2.634 billion bushels for corn. Livestock on feed levels remain elevated and point toward strong feed use in the second quarter. If the historical pattern of feed and residual use in corn hold this marketing year, the second quarter use may be near 1.547 billion bushels. The March 1 corn stocks, due out on March 31, could reveal how quality issues and low corn prices impacted rations. Livestock prices fell sharply over the last few trading sessions on worries over reduced domestic meat consumption and disruptions to the supply chain for meat processing. Expanded meat purchases at grocery stores could offset some of the cancellations associated with restaurant and event closures. The impact on corn use for feed from the outbreak may not show up until later in 2020.
Corn prices will reflect the uncertainty surrounding economic outcomes from measures put in place to combat the outbreak over the short run. If the actions put in place lead to a relatively rapid turnaround, underlying demand fundamentals hold the promise of higher prices than currently reflected in the market. A severe economic contraction leading to a global recession opens the way for continued weakness in prices.
The farmdoc site's About Us page (on the University of Illinois website) describes its purpose:
The overall goal of the farmdoc project is the same today as in 1999 — to provide U.S. Corn Belt crop and livestock producers with constant access to integrated information and expertise to better manage their farm businesses. But, as technology has changed, so too has farmdoc. Spurred on by the mobile device and the social media revolution, busy people began to desire multi-platform accessibility to information and have it presented in a condensed format. In response, the farmdoc daily site was created in 2011. This site has the ambitious goal of publishing one new article of research-based analysis each business day. The articles on farmdoc daily have quickly earned a place on the must-read list of farmers, educators, journalists, traders, market analysts, and policy-makers around the globe.
At Successful Farming, Perkins continues:
. . . 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.”
. . . 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. . . .
Read the entire article at Successful Farming. At Farm and Dairy, Farm and Food File columnist Alan Guebert writes on Thursday in Crude oil’s price collapse hits ethanol market hard:
February is a paradox. Leap Year or not, it’s the shortest month of the year, yet it always feels like the longest month of winter. Endless gray skies bleed into endless gray days into an almost endless gray month.
Then March appears with its light, color and hope and February’s dreariness is soon forgotten.
Light, color and hope are needed this March as political leaders, markets and the world economy tumble into a virus-choked mud hole of confusion, finger-pointing and inaction. Worse, this mess will likely get messier.
How much messier? Unknowingly messier. . . . .
What will the world economy look like if key nations such as Italy, already locked down, and America, where schools, universities and convention centers are beginning to lock down, take a similar — and, frankly, as miraculously short — time to return to normal?
It’s truly a guess and guess high, not low.
Oil Fight
Now add to that sour picture the Saudi Arabian/Russian fight over the global crude oil market. In just two weeks, the virus-fueled dual to cut production to push up prices devolved into a produce-or-die match between two oligarchies hoping to drown each other. Almost every nation expected the brawl to bring higher crude prices.
On March 8, however, the race to the bottom between the two began and crude prices collapsed from $60 per barrel the week before to $30 per barrel that night. And, just like that, the world’s leading commodity lost half its value to one virus and two autocrats.
Thirty-dollar crude sounds great until it hits the American economy’s kneecaps: higher unemployment, decreased spending, lower exports, greater federal spending and higher government deficits.
To get a closer-to-home idea of the devastating impact of crude’s price collapse, consider what would happen to rural America’s economy if cash soybeans fell from $9 per bushel to $4.50 or if corn prices dropped from an already-low $3.60 per bushel to $1.80.
Now consider both price collapses happening in less than two weeks.
While that hasn’t happened, both — and, really, all commodity — markets are under the triple threat of still-in-place American tariffs, coronavirus-slammed world demand, and now a bloodletting oil war whose shock waves will pound the U.S. ethanol market and global oilseed markets throughout the spring and summer.
For proof, reported Yahoo Business, just moments after the Saudi/Russia oil war exploded onto world markets March 9, American biofuel players dove for cover.
“U.S. ethanol margins got crushed,” that day, “as cheaper crude makes the biofuel less appealing.”
Share prices of ethanol makers, it continued, were hit first and hard: “…(S)hares in producer Pacific Ethanol Inc. plunged as much as 28%” and “Archer-Daniels-Midland Co., which is trying to sell its dry ethanol mills, slumped as much as 7.1%.”
Worse, according to biofuel officials March 11, the “White House now appears ready” to appeal a “unanimous court decision that would halt the Environmental Protection Agency’s abuse of Small Refinery Exemptions… which have destroyed demand for billions of gallons of homegrown biofuels.”
But the president’s always-weak promise to protect the U.S. ethanol market is a campfire compared to the implosion of the global crude market. If crude prices remain at half their March 1 value, either ethanol prices — and corn prices, too — must fall to remain competitive or ethanol plants must close because they can’t cover their variable costs. . . .
Uffda. The headline on Wednesday in the Houston Chronicle said it all U.S. ethanol prices hit lowest point since 2003. The details:
U.S. ethanol prices have hit lowest point in more than a decade, according to new figures from global energy research firm S&P Global Platts.
Ethanol trading on Chicago's Argo Terminal closed at 99 cents per gallon on Tuesday, the lowest price for the corn-based fuel since 2003 and the first time its assessed value has dropped below the $1 per gallon mark.
"The price decline has been driven by a combination of factors including coronavirus-related demand fears and falling gasoline prices in the wake of Saudi Arabia’s decision to raise crude oil production and discount prices -- actions which started a crude oil price war with Russia, and which has put downward pressure on an already oversupplied ethanol market," said Sophie Byron, an ethanol expert with S&P Global Platts.
As one might expect from an industry predicated on government policy, the industry is asking for relief. On Wednesday in Ethanol Producer Magazine, the American Coalition for Ethanol wrote in ACE: Economic stimulus needed amid COVID-19 market fallout:
As the coronavirus (COVID-19) spreads across the U.S., threatening American lives and adversely impacting the nation’s economy, the transportation fuel sector will be especially hard hit. Declines in consumer gasoline use will shrink demand for corn ethanol. In response to the economic turmoil being felt by its members, the American Coalition for Ethanol CEO Brian Jennings released the following statement:
“As Americans do their part to minimize activities and slow the coronavirus’ spread, it creates yet another headwind for ACE members already harmed by trade wars and EPA’s abuse of small refinery exemptions under the Renewable Fuel Standard (RFS). While the Trump Administration was quick to buoy Big Oil by pledging federal purchases to fill the Strategic Petroleum Reserve (SPR), the President and Congress will also need to take action to help ethanol producers, and the farmers supplying them
corn, who are suffering a proportional economic disaster.
“Preliminary economic forecasts estimate the lack of gasoline consumption caused by the coronavirus will likely reduce ethanol demand by hundreds of millions of gallons and cut corn grind by hundreds of millions of bushels. Demand destruction could be on steroids for several weeks, taking money from the pockets of farmers and ethanol producers who are already suffering from trade wars and mismanagement of the RFS.
“As a first step, the Administration should announce it will comply with the Tenth Circuit’s ruling limiting small refinery exemptions, which benefit oil companies at the expense of farmers and rural Americans, and apply the court’s decision nationally to end the misuse of the RFS. Additionally, EPA should at long last restore 500 million gallons to the RFS in compliance with the 2017 DC Circuit Court case regarding the improper use of EPA’s waiver authority.
“Further, with China releasing its list of U.S. companies eligible to export DDGs earlier this week, the Administration must push to reduce or remove Chinese tariffs to make that huge potential export market a reality. Ethanol producers have diversified over the past several years, enabling them to adjust operations and increase co-product output in response to market signals. Now more than ever we need to sell ethanol and DDGs into all domestic and foreign markets.
“These are first steps. ACE will be actively discussing additional actions that can be deployed both in the near- and long-term to mitigate the staggering and potentially unprecedented impact coronavirus will have on ethanol demand. Whether that be new policies to spur the use of low carbon fuels or additional emergency authorities the Administration or Congress could implement, ACE will be providing decisionmakers in the nation’s capital with economic stimulus recommendations.”
And there's that a 10th Circuit Court of Appeals decision from January that curtailed its issuance of waivers to gasoline makers, that's caused Trump to be pulled back into oil-ethanol fight, Politico Morning Energy reported on Monday.
Thursday's Morning Energy notes:
GRIN AND BEAR MARKET: Crude oil prices sunk to their lowest levels in 18 years, shedding another 25 percent to reach $20.48 a barrel on Wednesday. The oil and gas industry, meanwhile, has sought to calm fears that energy producers could be crippled by the coronavirus pandemic, Pro's Ben Lefebvre reports.
Update, March 19,7:40 p.m.: An few more articles have come our way. At Feedstuffs magazine, Jacqui Fatka reports in Ethanol industry faces perfect tsunami as prices tank:
Ongoing trade disputes, small refinery exemption uncertainty, demand destruction from COVID-19 and an oil price war between OPEC and Russia has conspired together in creating not just the perfect storm for the ethanol industry but a perfect tsunami, according to Geoff Cooper, president and chief executive officer of the Renewable Fuels Assn. (RFA).
Cooper joined with industry members in a media call Thursday to highlight the bleak situation facing the ethanol industry, which was already experiencing demand destruction and challenging economics before the roil in energy markets and near-term drop in motor gasoline consumption by 20-25%.
RFA chief economist Scott Richman stated this week that the spot ethanol price reached its lowest level since 2003, while crude oil prices have seen a 24% price decline and gasoline a 10% drop. In estimating margins for ethanol producers, he estimated that producers are losing 25 cents/gal. on a spot basis, which puts many “very far in the red.”
Richman said there isn’t a definitive number on ethanol plants idling because it is a fluid situation but noted that a handful already were idled or running at reduced rates. Some plants are showing no bids.
Corn prices have also taken a significant hit on the board in recent days, and Richman said they could be at risk of dropping further in the near term.
Randy Doyal, CEO of Al-Corn Clean Fuel in Minnesota, noted that he has not seen anything of similar magnitude hit the industry since the financial collapse, and that impact was fairly short. “We will all feel this much longer than we want, and it will not be good,” he said. Doyal said ethanol plants will face forced shutdowns due to logistic issues with full tanks and nowhere to send supplies, which looks inevitable.
Read the entire article at Feedstuffs. Reuters reports in U.S. biofuel group says ethanol industry sharply cutting production:
The head of the Renewable Fuels Association biofuel trade group said on Thursday that “many” U.S. ethanol plants have cut production over the past week, and some have idled completely as a result of slumping demand.
RFA president Geoff Cooper said in a conference call he expects production of the corn-based fuel to fall further, and called on the U.S. Environmental Protection Agency to ease strain on the industry by ceasing to grant small refineries waivers from the nation’s biofuels mandates.
Successful Farming carries a longer version of the Reuters piece, including more from Al-Corn:
Margins to produce ethanol, which the United States requires to be blended into the nation's fuel pool, have tanked, prompting concern about plant shutdowns and layoffs. Ethanol refining margins in the Corn Belt <ETH-CB-REF> fell to as low as -11 cents a gallon in early March and currently sit at 10 cents a gallon.
"We're doing everything we can to make sure we can survive and weather the storm but it's definitely going to be ugly," Randy Doyal, chief executive of Al-Corn Clean Fuel in Claremont, Minnesota, said during the conference call hosted by RFA.
The article notes that some processors are trying their hand at the sanitizer market:
Some companies have shifted production to take advantage of a market that has seen a surge in demand: hand sanitizer, which can be made using ethanol. Governments and health agencies have advised people to wash their hands and use hand sanitizer to mitigate the virus' spread.
"We've tried to shift our focus and supply as much on the hand sanitizer markets as we can," said Chad Friese, general manager of the Chippewa Valley Ethanol Co in Benson, Minnesota.
Listen to the entire media call here.
Permanent file:
Rfa-cvid-ethanol
[end update]
We'd make a modest proposal that given the circumstances, Minnesota's farmers might consider raising people food rather than industrial commodities, but when we consider the relentless economies of scale of modern agriculture and the looming planting season, the likelihood of those production and marketing efforts taking place is close to nill. Friends who run CSAs should do well, and in the meantime, Bluestem's editor will cultivate her own gardens.
Photo: The Corn Plus Ethanol plant in Winnebago, Minnesota, idled last year. While the Successful Farming headline Ethanol prices hit all-time low, unconfirmed reports of plant shutdowns,suggests it may have company in the future, we weren't able to find any instance of new idlings or shutdowns.
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