Ethanol Industry Banking on China and an Uptick in Domestic Demand

Source: By Anna McConnell, • Posted: Monday, February 29, 2016

Even with record ethanol stocks and a lull in demand, the ethanol industry remains upbeat about the 2016/17 year of production. If anything, ethanol insiders are hopeful for domestic demand to pick up and for international demand to grow.

“I don’t see the kind of disaster that a lot of people in the ethanol market are talking about right now,” says Geoff Cooper, senior vice president of the Renewable Fuels Association. “I think we might see a slight pull-back in production, but as we move into summer and people start driving more and burning more gasoline, I think the record number of stocks we have will work off pretty quickly.”

The USDA’s WASDE report is predicting that the ethanol industry will use up 5.225 billion bushels of corn in the current crop year, which ends in September. The National Corn Growers Association (NCGA) estimates a number closer to 4.1 billion when DDGs are extracted from that value.

Ethanol holding its own
“The Department of Energy is expecting that the amount of gasoline we use will be the second most we’ve used in history,” says Cooper. “I think we’ll set a new record this year for U.S. ethanol blending despite the fact that we have $30 oil and low gasoline prices.”

Although crude oil has been trading more than 47% lower over the course of the last 12 months, ethanol has seen a positive trading pattern over that time period, trading over 6.25% higher.

“If the ethanol industry can hold market volume from that much of an oil price decline, that’s a pretty good sign,” says Paul Bertels, NCGA vice president of production and sustainability.

In 2016 so far, ethanol futures have traded a bit lower, but not over .5% below. Ethanol producers seem optimistic, especially with opportunities to export overseas.

“It’s really encouraging to see a lot more activity with trade missions, that is trips that are in part specifically designed to put ethanol producers in front of potential buyers in other countries,” says Mike Jerke, CEO of Guardian Energy that has production facilities in Minnesota, Ohio, and North Dakota. “I think we’re going to see the list of countries we export to broaden out.”

Export expectations
Prior to 2015, China wasn’t a big player in the game of U.S. ethanol exports, but last year 70.5 million gallons of U.S. ethanol were exported to the Asian country. Only 3.3 million gallons were sent to China in 2014.

“We’re expecting to see continued growth opportunities in China,” said Cooper. “But we’re certainly not expecting the type of growth in percentage terms that we saw from 2014 to 2015.”

China is the third-largest ethanol producer in the world behind a strong Brazil and the number one producer, the U.S. China is a distant third, according to Cooper. They are currently the fourth leading export market for the U.S. behind a consistent Canada, Brazil, and the Philippines.

“Canada has been our most steady and stable market for the past five years, and we expect that to continue,” said Cooper of the 249 million gallons of U.S. ethanol that was exported to Canada in 2015.

We certainly have the ability to produce more than what the domestic demand would be, but fortunately for us the export piece does exist,” said Jerke. “That’s one that we’re really relying on.”

The idea of producing more than is able to be consumed is not lost on the ethanol industry insiders, as many plants have closed up or slowed production a bit over the course of the winter. However, many plants are still cranking out ethanol as usual according to Jerke and Cooper.

“We monitor very closely the weekly ethanol reports. What they’ve been showing us lately is that ethanol plants continue to operate at extremely high rates of output even though we have a situation where stocks are rising and have recently been at record levels,” said Cooper.

That’s clear by the net income values reported by big names like The Andersons Ethanol Group and Green Plains, Inc.

2015 was hard on ethanol plants
The Andersons Ethanol Group recently released its fourth-quarter and full-year reports, which showed overall ethanol production in 2015 up by 12 million gallons to 384 million gallons in overall production compared with 2014’s 372 million gallons. Pre-tax income for the year, however, was much lower than 2014 with the company only bringing in $28.5 million compared with the previous year’s $92.3 million in pre-tax income.

The company isn’t pulling back on ethanol production, though, as it forges ahead with the expansion of its Albion, Michigan, ethanol plant. By the first half of 2017, the company anticipates the Albion facility will be cranking out twice as much as the 65 million gallons of ethanol it currently produces a year.

After purchasing ethanol facilities in Virginia and Texas at the end of 2015, Green Plains released its net income numbers showing $7.1 million in 2015, which is a staggeringly low value compared with the company’s net income in 2014: a whopping $159.5 million.

“Even with strong global and domestic ethanol blending growth, U.S. production continues to outpace demand for the time being,” said Todd Becker in the press release announcing Green Plains’ 2015 and fourth quarter financial results.

POET, on the other hand, announced in January that three of its biorefineries – one in Iowa, one in Michigan, one in South Dakota – would be producing a combined 25 million more gallons of ethanol in 2016 than in the past. The company is expanding production, rather than pulling back.

“We set production records at 17 of our biorefineries in 2015,” says Jeff Laut, POET president and COO in a press release. “The industry is ready to give driers even more opportunities to use clean-burning, American-made biofuel.”

Jerke anticipates a slight increase in production for Guardian Energy in the coming year.

“The efficiencies and the cost of production that we’re able to achieve in the U.S. are quite competitive, and I think that’s good for the industry, and that’s good for the corn farmers,” Jerke said.