Ethanol picture changes dramatically in light of COVID-19

Source: By ANDREA JOHNSON, Courier • Posted: Tuesday, April 14, 2020

What was expected to be a banner year for ethanol production and corn sales now looks less promising – unless something even more unusual than a global pandemic occurs.

A trade war between Saudi Arabia and Russia helped turn oil prices lower in early 2020. COVID-19 arrived and the world dramatically dropped travel as people tried to slow the spread of the novel coronavirus.

Word spread via various news releases that 2020 spring gas prices would be the lowest in years. Indeed on April 1, reports across Minnesota indicated E10 was selling for less than $2 per gallon.

All of this points to reductions in ethanol production and corn use.

Prior to the COVID-19 pandemic, the Chinese government announced their plans to adopt a 10 percent ethanol blend for their motor vehicles. Back in September 2017, their goal was a nationwide ethanol mandate of E10 by 2020.

The Chinese government looked at ethanol as a way to reduce air pollution, but there were already news articles in October 2019 indicating things were not going as planned.

“China was going to a 10 percent ethanol blend. When they set their mind on things, we were anticipating maybe picking up some corn exports to China to help them meet this 10 percent ethanol blend,” said Ed Usset, University of Minnesota Grain Marketing economist. Usset spoke at the Soybean Symposium sponsored by the Minnesota Soybean Checkoff and held via webinar on March 26.

“A 10 percent ethanol in a very large market would create a tremendous demand for corn in China. It never really got off the ground,” Usset continued.

“But people within the corn industry, worldwide corn traders, corn merchandisers, had one eye on that goal of China, and said, ‘Boy, if they do that, this is good news for corn trade in general worldwide.’ Well, they cut it off.

“Clearly they have other things to worry about, and hopefully it comes back for the sake of the corn market. Hopefully they renew that commitment maybe in a year or two, but for now, it’s suspended.”

Exporting corn to China to make ethanol no longer appears likely in the short-term. In the March World Agricultural Supply and Demand Estimates (WASDE) report, USDA forecasted China’s corn imports at 276 million bushels.

USDA also forecasedt U.S. corn exports of 1.725 billion bushels for the 2019-20 marketing year. In addition, USDA indicated U.S. ethanol production would use 6.82 billion bushels of corn. Corn ending stocks were 1.89 billion bushels in the March report – a number that Usset expected would increase in the April WASDE report.

The domestic corn industry waited for the April report to see what changes were made to that number in light of the COVID-19 crisis.

In recent years, China has been a major export destination for U.S. distiller’s grains (DDG). If the U.S. reduces ethanol production, that could result in less DDG available to ship to China and could result in an increase in soybean exports from the U.S. for soybean meal.

The U.S. rapidly reduced travel as the nation fought to keep COVID-19 from reaching citizens. Shelter-in-place tactics were used across the nation with national and state governments asking non-essential workers to stay home.

Ethanol production in the U.S. hit over a six-year-low in production at 840,000 barrels daily for late-March. At the same time, ethanol stocks reached a record high 25.7 million barrels.

“We’re closing ethanol plants right now,” said Usset, adding that Poet announced on March 24 they were suspending corn buying at seven plants due to weak ethanol demand and in response to COVID-19. Poet is the biggest ethanol producer in the country and purchases 5 percent of the U.S. corn crop to produce 2 billion gallons of ethanol. The plants included three plants in Minnesota – Bingham Lake, Glenville and Lake Crystal. Plants at Big Stone, S.D., and Mitchell, S.D., as well as at Gowrie, Iowa, and Groton, Iowa, were also affected.

“It’s about what’s going on in the world of crude oil,” said Usset. “It hasn’t been good.”