US corn's focus on ethanol amid crumbling gasoline demand fears

The US response to the Covid-19 outbreak could see demand for blended gasoline fall by up to 20%, sparking a huge reduction in demand for ethanol and cutting demand for thousands of tonnes of corn, market sources have told Agricensus Friday.

Biofuels are mandated to be blended into the road fuel supply, with ethanol contributing up to 10% of the mix, with the drop-off in demand already sparking reports that some production sites have stopped bidding for corn.

“The ethanol world is dominating the corn demand headlines now – when ethanol plants go no-bid for corn, it scares a few people,” one market source said.

“I think gasoline demand in the US is 400 million gallons/day – I’ve seen estimates say we’re down 50%,” the source said, as shops, schools and businesses close down amid attempts to stop further spread of the virus.

“The large decline in energy prices is straining the US ethanol sector. It will take some time to sort out how much the ethanol industry will take a hit,” Futures International’s Terry Reilly told Agricensus.

Oil, equity and commodity prices have collapsed in recent sessions as investors anticipate a huge drop off in demand and a massive slowdown in economic activity. 

“Some energy traders are now talking about (gasoline demand) down 10-20% over the next couple of months for the US. That’s a huge decline for US conventional demand,” Reilly said.

According to the US Energy Information Administration, the US consumes on average 389.63 million gallons of finished grade petrol every day – with the current Renewable Fuel Standard (RFS) mandating that 10% of the fuel should be drawn from sustainable fuels.

A fall in demand of between 10-20% could amount to a loss of ethanol demand of around 5.9 million gallons per day – conservatively equating to a loss of around 50,000 mt of corn demand per day.

If stretched out over two months, that could amount to 3 million mt of demand destruction for corn, and 354 million gallons of ethanol.

“Our chief economist looked at the peak-to-trough monthly gasoline consumption data from the first Gulf War, 9/11 and the (2008) Great Recession, and there were two drawdowns of around 20% and one of 13%.” Ken Colombini of the US Renewable Fuels Association told Agricensus.

A 50% decline in gasoline demand seems “highly unlikely,” but Colombini said the industry lobby group is “aware of the possibility of a significant future impact on gasoline consumption.”

Ethanol

Under the RFS, 15 billion gallons of ethanol is required to be blended into the US fuel supply.

The USDA currently predicts US corn production of 347.8 million mt in the 2019/20 marketing year, with 137.8 million mt of that – 40% – expected to head into ethanol production.

Around 70 million mt has already been consumed by producers, with any major slowdown in demand likely to severely derail that outlook as the sector enters the second half of the marketing year.

That would funnel more corn into ending stocks and exports, weighing on global corn prices.

But there are bigger questions for the health of the US ethanol sector, after US producers cranked up production on recovering margins, buoyed by the signing of the US-China Phase One trade deal and hopes of new export opportunities.

Daily production data from the EIA shows ethanol run rates since January 1 are 4% higher than the same period of 2019, with margins at almost the same level.

However, stocks of finished ethanol have swollen to record-breaking levels at close to 25 million barrels – up nearly 3% on the same period of 2019.