Viewpoint: US ethanol production threatens recovery

US ethanol crush margins, which measure the profitability of producing ethanol from corn, climbed to an average 28¢/bushel in November, from 16¢/bushel in September, thanks to falling output and lower corn prices.

But the upward trend waned moving into 2020, on lax production discipline, limited domestic demand growth and lower exports. Margins averaged just 10¢/bushel in December.

An up and down year

In the first eight months of 2019, ethanol production rates were above the five-year average, setting new seasonal records in June and July. But the growing production exceeded demand from domestic gasoline blending and fuel ethanol exports, which led to oversupply and lower prices.

Prompt in-tank transfers of ethanol at Kinder Morgan's Argo terminal near Chicago oscillated between 126.5¢/USG and 154.5¢/USG between January-August, compared with five-year averages that moved between 151¢/USG and 177¢/USG.

In September-October, the ethanol industry showed signs of production discipline as plants closed. The closures balanced out the market by reeling in production to levels that allowed for inventories to drop. Some ethanol companies said in their 2019 third quarter results that fewer plants had created a more balanced market, allowing them to incrementally increase production to keep up with demand.

In September-October prices for prompt in-tank transfers of ethanol at Kinder Morgan's Argo terminal near Chicago strengthened with the plant closures, with prices between 139¢/USG and 157¢/USG compared with five-year averages ranging from 151¢/USG to 161¢/USG.

Lower corn prices also supported margins during September-December. Flooding in the Midwest drove up corn prices in June to an average $4.35/bushel. But prices came down after the US Department of Agriculture' s World Agricultural Supply and Demand Estimates started showing higher than expected post-flooding estimates for planted corn acreage. December prices averaged around $3.78/bushel.

Growing production a threat

Increased production in November and December, however, threaten the production discipline seen in September and October, with output quickly approaching the upper echelons of the five-year range. This suggests inventories could creep up in 2020, which would erode margins again.

The demand outlook has limited growth prospects. US refiners have blended above their required obligation for ethanol D6 RINs for the past six years, and some exports have been met with trade barriers, despite being marketed and sold to over 60 different countries in Asia, Latin America, Europe and the Mideast. India now requires licenses to import ethanol, while Brazil has implemented a tariff rate quota — requirements that have cut the volume of duty-free ethanol imports to both countries.

Adding to stifled foreign demand is the US-China trade dispute. An interim trade deal between Beijing and Washington does not remove tariffs that have cut flows of US ethanol and other energy commodities to China. China will struggle to meet its E10 biofuel blending targets without access to US ethanol, but Beijing says its energy purchases will be "as needed" and based on market fundamentals moving into 2020.

By Thom Dwyer and Jacqueline Reigle