Here’s Why Brighter Days for Ethanol Demand Look To Be Ahead

Source: By Tyne Morgan, Agpro • Posted: Sunday, June 14, 2020

USDA issued its latest supply and demand estimates this week and made adjustments to 2020 ethanol demand. USDA trimmed its corn used for ethanol forecast by 50 million bushels, chalking it up to a slower-than-expected recovery in ethanol production. Arlan Suderman of INTL FCStone says these cuts could be just a start.

“We’ll probably see some more adjustments yet,” he said on U.S. Farm Report. “We’re [INTL FCStone] still about 80 million bushels below where USDA is at. If we continue to bring back driving at the pace that we are, we’ll probably pull our numbers a little bit higher. USDA, I think, will need to come a little bit lower and probably meet somewhere in the middle. So that means probably another 30 to 40 million bushels lower.”

While the 2020 ethanol demand story continues to evolve, Pro Farmer’s Brian Grete says there’s no way to make up for that lost demand this year.

“We aren’t going to make up for it; that’s pretty obvious,” says Grete.

Suderman says while 2020 may not be the year the ethanol industry wanted for demand, the situation looks more promising for 2021.

“We feel good about next year,” says Suderman. “There’s a theory out there that with people afraid to fly, we may actually exceed driving levels by the time we get into the next marketing year. And if that happens, we might be able to push next year’s ethanol use back up to more normal levels or maybe even a little bit higher.”

USDA looked at both old and new crop in its latest report, but Grete says overall, the June report was bland.

“The other side of it is the exports have been lacking, as well, and USDA chose to make no change on the pace for the export side, not just in the old crop marketing year, but for the new crop marketing year,” he says.

Grete says USDA always has a history of trailing when it comes to forecasting world production numbers, so the fact not many changes were made to the world numbers wasn’t a big surprise.

“With the situation of the Phase One agreement, COVID and everything else that the market has been dealing with, now I think USDA is lagging on the domestic side as well,” says Grete. “USDA is just playing catch up and isn’t fully caught up, and that’s probably the biggest thing out of this report. We’re now backward-looking instead of forward-looking on a lot of these forecasts.”

Suderman thinks its forecasts like what USDA put out for South America’s crop has more room for adjustments.

“We were a little bit disappointed Brazil didn’t come down on its soybean production estimate, and did come down further on corn,” says Suderman. “I think the traders were a little bit surprised by that, but it wouldn’t have been a game changer by any means. I think USDA is so surprised by the rapid pace of exports out of Brazil, it’s trying to make its balance sheet work. I think maybe there are more beans there in storage in Brazil than what USDA knew – or anybody knew – but whether the crop is 124 million metric tons or  there were beans that we previously didn’t know about now being shipped, neither one is a friendly story.”

Both Grete and Suderman say weather is what the market will be watching for the next several weeks. So, are the analysts hearing more forecasts for hot and dry, or crops that could see consistent drinks of rain? Both talk about it in this week’s marketing roundtable below.