Increase in ethanol production likely to outpace near-term demand

Source: By Robert Pore, Grand Island Independent • Posted: Monday, August 21, 2017

According to a new report from CoBank’s Knowledge Exchange Division, the ethanol market will soon face worsening slim-to-negative profit margins, which could potentially push the industry toward consolidation. However, producers that are well-capitalized with strong balance sheets and cash reserves will be in the best position to weather the softening market, the cooperative bank reported.

The report, “Ethanol’s Growth Path: Output and Export Uncertainties Both Rising,” outlines how an ethanol market fueled by corn prices at multi-year lows coupled with reinvestment into production capacity will push supply past demand growth.

“Forecasts indicate that total ethanol production by 2020 will have increased by approximately 850 to 900 million gallons, compared to 2017 levels,” said Tanner Ehmke, CoBank senior economist. “Without a substantial increase in domestic demand or exports to clear excess supplies, ethanol producers are facing a downturn over the medium term. Those who have access to multiple transportation markets and have invested in new technology will be leaner and more cost efficient enabling greater flexibility to endure prolonged periods of low prices.”

 According to the CoBank report, domestic demand for gasoline blended with ethanol has been strong over the last 18 months, as low fuel prices resulted in consumers driving more. A second bright spot for ethanol, the report said, has been continually rising ethanol blend rates at the pump. While E-10 (gas containing 10 percent ethanol) remains the dominant fuel blend, consumers are increasingly buying higher blends like E-15 (15 percent ethanol).

Currently, ethanol is blended with 90 percent of all fuel in Nebraska. There are over 227,000 flex-fuel vehicles in the state, which equates to 1 in 7 Nebraska vehicles. Flex-fuel vehicles can run on a fuel mixture of 85 percent ethanol and 15 percent regular gasoline. There are 95 stations in Nebraska that sell E85 blend.

The CoBank report said the longer-term picture for ethanol in gasoline is less optimistic. Thus far in 2017, CoBank said export weakness and lower distillers grains (DDGS) prices have hurt margins.

Exports of ethanol, particularly to Brazil and China, have been strong over the last year, but the CoBank report said that picture has changed significantly and the outlook for future ethanol exports suggests a continued decrease.

China has effectively ceased ethanol imports from the U.S. following its implementation of a 30 percent tariff on U.S ethanol. Exports to Brazil are also expected to erode as Brazilian sugar refiners come back online following a sugar crop failure in 2016, which led to the country’s heavy reliance on ethanol imported from the U.S.