Viewpoint: Corn, demand to weigh on US ethanol margins

US ethanol demand is poised to remain shaky going into 2021, putting a ceiling on values and driving margins deeper into negative territory even as feedstock prices rise.

Ethanol prices have mostly declined since November as rising stockpiles pressured markets.

Between low ethanol blending and higher production, ethanol stocks have steadily risen for nine straight weeks by 3.9mn bl to 23.5mn bl as of 25 December, according to data from the Energy Information Administration (EIA). The last time inventories were higher was late May earlier this year.

Implied gasoline demand and ethanol blending both remain well under their year-ago levels. The latestethanol blending figures were reported at 818,000 bl, down 7.5pc on year-earlier levels. Gasoline demand was last at 8.1mn b/d, 9.3pc lower than the same week a year earlier, before the Covid-19 pandemic pushed the US into a deep recession in the spring of this year.

Ethanol production rose as high as 991,000 b/d in early December, seemingly outpacing gasoline demand before bearish concerns of low ethanol demand and high feedstock costs forced the industry to cut production to its lowest in more than two months. Ethanol output was last at 934,000 b/d for the week ended 25 December, its lowest level since the week ended 16 October.

Ethanol values had been steadily recovering since April, when as much as half of the ethanol industry idled production, shrinking stocks to their lowest level in more than three years by late October at 19.6mn bl. By that time, spot ethanol values rose sharply. Prompt in-tank transfers at Kinder Morgan's Argo terminal went as high 161.1¢/USG on 27 October, their highest level so far this year. Production has since steadily ramped up and contributed to inventories.

Currently, supplies and underperforming export activity demonstrate current production is outpacing demand.

Ethanol values at Argo fell to 126.85¢/USG earlier this month, their lowest levels since August even as corn steadily firmed. Chicago rule 11 and New York Harbor barge values are both seeing similar patterns.

Front-month CBOT corn futures last settled at 466¢/bushel on 30 December after 10 straight days of gains to reach their highest level since 29 May 2014 when they were 469.5¢/bushel.The recent strength has come from steady demand and bullish market concerns about a smaller- than-expected corn harvest in South America.

Although ethanol prices have found support in recent sessions, tracking higher corn futures, production margins unraveled to their lowest levels in more than eight months. Margins have been negative since mid-November and sank as low as -76¢/USG on 24 December, their lowest since 8 April when they were -80¢/USG around the height of the Covid-19 lockdowns.

Producers have been able to alleviate some of the losses from lower fuel ethanol values and margins with help from sales of key byproducts, such as distillers' corn oil (DCO) and carbon dioxide (CO2). DCO values have steadily risen a market-wide feedstock rally and seasonal demand for DCO drove robust demand in the fourth quarter. C02 moving by truck and rail from ethanol plants has been in high demand from beverage producers for carbonation purposes and the medical industry for its use as a refrigerant.

Unless gasoline demand recovers at a faster pace or export activity picks up to draw on stocks, ethanol producers are approaching a point where they will have to rein in production so it can reach parity with current demand levels before corn futures ease down from their historic highs.

As the Covid-19 vaccine becomes more widely administered, it could lead the way to travel and economic restrictions being lifted and higher gasoline and biofuel demand. The higher demand would serve to balance out the market.

Exports will be a major factor as the US ethanol industry is structurally oversupplied and depends on foreign markets to offload surplus production and stocks.

Still, demand abroad has struggled as Brazil placed an import quota on American exports. Recently, Chinese demand has perked up, with 30,000t of ethanol imported from the US in December and 80,000 t more slated for delivery in January. High feedstock costs in China have sharply supported ethanol values there, creating an opening for imports.

The only month that US ethanol exports surpassed year-earlier levels in 2020 was January and February, at 115,764 b/d and 158,862 b/d, respectively. That was before the pandemic struck full force.

By Thom Dwyer