Commodities 2023: Ethanol plants in US to face hard choices

Source: By Wesley Swift, S&P Global • Posted: Tuesday, December 20, 2022

For the US ethanol market, 2023 could have a rough start.

Facing dropping winter temperatures and falling demand for ethanol for blending, many ethanol plant operators face a tough choice. Do they keep churning out the biofuel, losing money, or shut down the plant and risk losing more?

“You can run and lose $12 million a month, or you can shut down and lose $15 million a month,” said a broker familiar with the logistics of running a plant.

Furthermore, the cold, blustery winters typical of the Midwest, where the bulk of the nation’s ethanol plants are located, pose substantial risks to the plants. A plant must be heated during the winter to protect against freezing temperatures, regardless of whether it is producing ethanol.

The industry has chosen to keep running. Domestic ethanol production has remained above the milestone 1 million b/d mark for the last nine weeks of 2022, according to data from the US Energy Information Administration.

Ethanol production over 1 million b/d at year’s end and into the new year isn’t a new occurrence. The difference heading into 2023 concerns production and its relationship to demand.

Since 2011, the difference between ethanol production and blending demand averaged 90.5 million b/d. Since the week ended Oct. 4, production has outpaced demand by an average of 148 million b/d, peaking at 229 million b/d in the week ended Dec. 2.

Furthermore, a spike in gas prices caused by inflation suppressed driving demand during summer, typically the top driving season. From Memorial Day to Labor Day, production outpaced demand by 120 million b/d. For July, production outpaced demand by 130 million b/d. As a result, ethanol stocks have boomed, reaching the highest levels since April.

Sources had said previously that massive stocks are to blame for the recent downtown in prices. In response, prices have plunged. Platts’ Benchmark Chicago Argo has lost 73 cents/gal since Nov. 7, dropping by $2.87/gal to $2.14/gal on Dec. 16.

“The problem is that [the industry] is still too fragmented,” the broker said. There are 192 ethanol plants in the US, according to the EIA. Many are smaller operations that provide key jobs in their area. Those operators run the risk of losing personnel if they shut down. Others are owned by farming co-ops who would prefer to keep running their plants to ensure a steady source of revenue for their corn crop.

Bigger operations owned and operated by major agriculture operations can absorb some losses before having to roll back production. And if the big operators aren’t shutting down, the broker said, the smaller outfits are reluctant to make that decision on their own.

“Realistically, if you don’t have any of the big producers shut down, you won’t be able to get the stand-alone plants to follow,” the broker said.

As 2023 approaches, conditions can be expected to continue to worsen. According to the EIA, ethanol demand for blending historically reaches its lowest point of the year between January and February.

Should production continue at its current level, prices would be expected to trend downward.

Furthermore, after a rather mild winter, temperatures have started to drop sharply that has led to a sharp increase in natural gas prices. The bulk of energy use in an ethanol plant comes from burning natural gas to generate steam and heat used in the distilling process. The spike in natural gas prices led to a brief rally on Dec. 13 fueled by market worries that the increase could force some plants to curtail production.

But at some point, the broker said, something has to give. An ethanol plant, like any other business, can only lose money for so long. Eventually, production has to fall, or some plants may not be able to continue operating.

“It’s going to get bloody in a little while,” he said.