GPS data hints at scale of US corn demand destruction
At 6:30 am Pacific Time, and the GPS data from hundreds of thousands of journeys tracked by mapping company TomTom shows no congestion on Los Angeles main routes, with just three traffic jams reported and queues of around 0.8 kilometres – barely half a mile.
For anyone that knows LA’s freeways, even at that unearthly hour the situation is almost unprecedented, and hints at the scale of demand destruction that US road fuels are now facing.
Measures to contain the spread of Covid-19 are now thoroughly implemented, and many of the country’s most populous states have imposed lockdowns – everyone knows the hit is coming, but at this stage, it’s still hard to gauge how big and how sustained it could be.
Through the country’s ethanol blending programme, which mandates that up to 10% of the nation’s road fuel must be sustainable and is mostly covered through corn-based ethanol, it will translate directly into a potentially huge fall in corn demand.
That is a fact that is not lost on anyone watching corn futures, which remain subdued despite recoveries in wheat and soybeans and even amid China buying of US corn.
It is likely to be a loss that no Phase One trade deal will be able to cover.
All across the US, the country’s congested cities are reporting markedly lower activity – New York City, the second most congested in the US shows 4% congestion, versus the usual 44% as the city approached 10 am local time.
Chicago, eighth on the US list, shows congestion of 3% versus 41% at 9 am – and the picture is repeated across virtually every city right down to the twin cities of Greensboro-High Point in North Carolina, nestling down in 80th place.
Trade sources are starting to fear the worst, with estimates of even 25% demand destruction starting to look undercooked.
The figures are stark – in 2019, the US averaged 389 million gallons of finished gasoline consumption every single day of the year.
On average, incorporation rates in 2019 were down versus 2018, but taking the mandated 10% as a starting point then ethanol demand stood at 39 million gallons.
An average conversion for most facilities is 2.8 bushels of corn to every gallon of ethanol produced – meaning the daily consumption of ethanol in finished gasoline accounts for almost 14 million bushels (353,804 mt) of corn every day.
Lose 25%, and the US loses almost 89,000 mt of corn demand every day, close to 625,000 mt every week – with a wholly-feasible three-month period of dislocation potentially cutting out 7.5 million mt of US corn demand.
And traders are starting to fear the lockdowns could see demand fall by even more than 25%.
Margin call
That outlook is already seeing producers cancelling their buying activity for US corn, as production margins turn heavily negative.
According to a model from Iowa State University, margins in the week to March 20 moved from a very slim plus $0.02/gal, to average minus $0.06/gal over the week, with ethanol prices shedding 8.7% of their value between Monday and Friday, and the trend pointing only one way.
Wednesday’s weekly petroleum production data, also covering the week to March 20, will be the first opportunity to gauge the size of the scale back of production with analysts already calling for a 20,000 barrel production fall to 1.015 million barrels.
With corn cash bids at many production facilities either drying up or plunging sharply, the signs are that a big and potentially protracted cutback is coming.
Ethanol by-product, dried distillers grains (DDGS) also responded, with US Gulf FOB cargo offers drying out and only June shipment heard offered at an eye-watering $270/mt overnight – versus $218/mt at the same point of February as markets brace for a drop off in supply.
Large scale shuttering of plants will make it hard for the US to hit the forecast of 5.425 billion bushels (137.8 million mt) of corn used in ethanol production through 2019/20, especially with stock levels at a near-record high of 24.59 million barrels.
Impacts
That will spill over into higher ending stocks, bigger usage in feed lots and potentially more competitive US exports, but the loss of DDGS supply could provide some outlet to US feed corn both domestically and overseas.
Meanwhile, at 8:00 am and LA’s daily commute kicks into gear with 18 traffic jams and 8.8 kilometres (5.5 miles) of jams while congestion stands at 8% - meaning that journeys that typically take 30 minutes are currently taking 8% longer than 30 minutes.
Normally, traffic levels mean the delay stretches that 30 minutes by 70%.