Fewer Americans are on the road, and with less gasoline demand overall, it’s having a severe effect on the U.S. ethanol market. As ethanol prices fall to a record-low level, the ethanol industry is grappling with a major crisis.
“The ethanol industry is facing its worst crisis of its existence compressed into a three to five day period,” says Arlan Suderman of INTL FCStone. “Ethanol margins just absolutely collapsed, basis collapsed and ethanol plants pulled their bids or even resold some corn that they had.”
Suderman says the corn market is facing a worst-case scenario right now, forcing some plants to halt production. Now, farmers are feeling the pain of a collapsing futures market, combined with a collapsing basis market.
POET announced this week it was suspending corn buying at a number of locations. The company said the decision was based on weak biofuel demand.
Joe Valavik of Standard Grain says the ethanol situation is a major weight on farmers as they head into planting.
“We have this situation where the Saudis decided that they would increase production to record levels, and we saw all of the energy markets just fall out of bed and ethanol was no exception,” says Vaclavik. “We're left with a situation where ethanol producers across the country are not buying corn from the U.S., or they've reduced corn purchases basis bids have backed off.”
Vaclavik says ethanol demand accounts for a large amount of the demand base in the U.S. As that demand declines, it could create even bigger problems for ethanol plants and producers.
“Essentially 40% of your demand base is the ethanol industry,” says Vaclavik. “So, we have some real problems there, and I think that that's going to continue to be the biggest issue here for the corn market for a little while.”
Suderman also thinks the ethanol situation will linger much of the year and have a lasting impact on prices this year. Suderman says it’s not just COVID-19 cutting into ethanol, but the price war between Saudi Arabia and Russia. He says those two factors are injecting a great deal of uncertainty into the market.
“We've shut down about 2 billion gallons of annual capacity,” says Suderman. “That's about 690 bushels million bushels of corn on an annualized basis, offset a little bit of that with increased corn consumption, that's about 550, and that's about 250 million for the current marketing year. I think the cuts [to production] will probably get deeper than that.”
As more ethanol plants shutter ethanol production and basis wanes, Suderman says China could come to the market to buy; however, it won’t be ethanol, but DDGs.
“We've seen China buy 30 million bushels of corn already, and we [INTL FCStone] think there's another 50 million bushels in demand,” says Suderman. “There may be more depending on what continues to happen in the northern part of China
Suderman says the greatest opportunity could be with distillers grains, and INTL FCStone forecasts 4 MMT of demand could come to fruition from China. In turn, domestic ethanol plants may have a better opportunity to produce- and sell- DDGs.
“We're seeing a lot of interest in that, particularly with some of those plants that are converted to the high protein DDGs,” explains Suderman. “We could get to the point where we're grinding for the DDGs rather than the ethanol, and where ethanol is the byproduct.”