US Ethanol Recovery After the Covid-19 Demand Collapse

According to our scenario analysis, US 2019/20 corn use for ethanol will be lower than the USDA’s May 2020 forecast of 4.950bn bu. Rabobank forecasts 4.800bn bu in its base scenario, with 4.566bn bu in the low case and 4.893bn bu in the high case. We forecast corn use for ethanol in 2020/21 at 5.069bn bu, which would make US 2020/21 corn ending stocks close to 3.5bn bu, keeping continued price pressure on corn prices.

The challenging times the ethanol industry faces might require some plants to either remain shuttered, adjust to producing new products, or be consolidated.

US gasoline and ethanol demand had flattened even before the Covid-19 crisis, as corn demand for ethanol fell to 5.4bn bu in 2018/19 due to small refinery exemptions (SREs) and increased fuel efficiency, though US mileage driven grew steadily by a total of 10% from sub 3 trillion miles per year in 2014 to almost 3.3 trillion miles by February 2020. However, stay-at-home orders across the country resulted in significantly reduced vehicle miles traveled. Miles traveled in April and May were likely the lowest, but March (for which official data is available) was already down 18% YOY – the lowest for that month since 1999. Lower demand and WTI crude oil prices also pressured gasoline and ethanol prices to extremely low levels. From the beginning of the year to the beginning of April, ethanol prices dropped 40% to USD 0.82/gal, before they recovered again to levels just shy of USD 1.20/gal. Ethanol demand moves almost 1:1 with gasoline demand due to Renewable Volume Obligations (RVOs), which must be met under the Renewable Fuel Standard (RFS). The absolute RFS number is administered via demand projections and allocated once a year as percentages to obligated parties. This means that US corn demand for ethanol is primarily determined by how much gasoline US consumers are using, and an unforeseen demand cut as seen in recent weeks will cut corn use for ethanol as the absolute volume use of ethanol will not be met.

US ethanol production temporarily fell as much as -48% YOY in late April. However, the easing of stay-at-home orders and slow demand recovery for both gasoline and ethanol are also moving corn use for ethanol higher again to -27% of last year’s use as of May 29.

The US Energy Information Administration (EIA) is projecting a strong recovery in vehicle miles traveled by July 2020 to 90% of normal and by September to above 95%. This is likely a best-case scenario, as many companies have already curtailed business travel for the entire year and some schools have enacted reduced in-class time for fall semesters. Commuters switching from public transport to driving and vacationers moving from airplanes to the roads will likely not be a major factor in the recovery pace, as we predict the impact to be less than 1% of total gasoline demand. Ultimately, gasoline and ethanol demand will be determined in the coming weeks and months as businesses reopen. In May, the USDA projected 2019/20 corn use for ethanol to be down 8% YOY at 4.950bn bu, which in our view is still too optimistic as it implies only a -3.2% YOY decline in demand for the remaining months of this marketing year (June to August). Rabobank forecasts 2019/20 corn demand for ethanol at 4.840bn bu, which would be a significant recovery in demand from the YOY decline we have seen so far during the Covid-19 pandemic (March -6% YOY, April -44% YOY, May -35% YOY). While some recovery is expected as businesses slowly reopen, we assume a more conservative -10% YOY decline in demand will be seen from June to August. With so much uncertainty, however, we could see a decline as big as -30% or as little as -6%, which is a range of 4.566bn to 4.893bn bu.

For 2020/21, the USDA expects an increase of corn demand for ethanol of 5% YOY to 5.200bn bu – down 3% from 2018/19 – which we also believe is too high. Rabobank forecasts corn demand for ethanol in 2020/21 at 5.070bn bu, with a +/-5% range of 4.816bn bu to 5.322bn bu. Much of the uncertainty will be during the first half of the marketing year, when the impacts from Covid-19 are still being felt.

2019/20 US corn ending stocks are likely to remain relatively flat YOY, rather than showing a decline like the USDA projected in May. For 2020/21, the drop in ethanol production, combined with an outlook of massive US corn plantings and an initial forecast by the USDA of a record US corn crop that exceeds last year by 17% and the previous record by 6%, has also caused corn prices to stay at levels below full cost of production for many US farmers.

Well beyond the ongoing ethanol demand recovery, an outlook of long-term declining US gasoline demand without an increased blending mandate will require total ethanol production to be reduced. The Covid-19 pandemic will likely also accelerate the needed consolidation of the ethanol industry.