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Ethanol demand rebounds after slow spring

Lincolnland Agri-Energy, Palestine, Illinois, processes 21 million bushels of locally grow corn into approximately 60 million gallons of biofuel, 160,000 tons of distillers’ grains and 9,000 tons of distillers’ oil.
Lincolnland Agri-Energy, Palestine, Illinois, processes 21 million bushels of locally grow corn into approximately 60 million gallons of biofuel, 160,000 tons of distillers’ grains and 9,000 tons of distillers’ oil.

WASHINGTON — The U.S. Energy Information Administration forecasts that per-day domestic ethanol production this year will be about 15% lower than in 2019 and the fuel’s producers continue to adapt in the ever-changing environment.

EIA projected in the June 8 short-term energy outlook that ethanol production will average 870,000 barrels per day in 2020 and rebound to 970,000 barrels per day in 2021.

EIA expects fuel ethanol margins to gradually increase, but lower U.S. motor gasoline demand will keep fuel ethanol production levels lower than 2019 levels in 2020.

U.S. fuel ethanol production fell dramatically during late March and in April 2020, driven by significant reductions in motor gasoline demand as a result of mitigation efforts for the coronavirus.

Fuel ethanol production fell to 537,000 barrels per day in the week ending April 24, which was the lowest level on record since June 2010, when the EIA began collecting weekly fuel ethanol production data. Because almost all finished motor gasoline sold in the United States is blended with 10% ethanol, the drop in gasoline demand has driven similar decreases in fuel ethanol demand and, correspondingly, fuel ethanol production.

Before country-wide mitigation efforts were implemented in response to COVID-19, fuel ethanol inventories were already trending at some of their highest seasonal levels in early 2020 because of relatively flat U.S. gasoline demand and limited domestic fuel ethanol demand growth beyond E10.

U.S. fuel ethanol inventories reached an all-time record level of 27.7 million barrels during the week ending April 17, which was 22% higher than at the same time last year.

As gasoline demand has begun to gradually recover, fuel ethanol inventory levels decreased to 22.5 million barrels for the week ending May 29, similar to their value in late May 2019.

Sharp reductions in motor gasoline blending demand reduced already weak fuel ethanol operating margins, leading many plants to suspend operations entirely or significantly reduce output.

Press reports indicate that nearly 30% of the nation’s fuel ethanol plants have been idled since early March, while another 35% have reduced production.

During a University of Illinois farmdoc-hosted webinar May 19, Eric Mosbey, general manager of Lincolnland Agri-Energy in Palestine, Illinois, discussed how the lower ethanol demand has impacted the locally-owned company.

How has Lincolnland Agri-Energy been doing through the pandemic?

“We at Lincolnland had been operating at a reduced rate since March when you could start to see this happening. Then looking at our production planning and nominations from our fuel customers for April you could just see how the demand destruction was going to be very, very eminent. So, we slowed. That’s how we cope with things. We slow down. We try to match our production to demand and cut costs as much as we possibly can and see how that plays out. And, of course, literally things just changed almost weekly through the last part of March through April.

“Now, we’re starting to feel a little more stable as we start to see demand come back and customers starting to talk about what their needs are going to be for June.

“Lincolnland has coped fairly well. We were able to slow down. Yes, it’s always an initial shock to the economy of the plant when your prices are in freefall, especially if you have inventories on the books, but then there’s always another side to that when the recovery comes. So, try to look further than just what the next few weeks are going to be and try to look at things at least quarterly and usually when you look at things quarterly there’s a little bit of light at the end of the tunnel.”

May saw a low watermark for production, is that because inventories on hand were being used during that time for both gasoline stocks and ethanol stocks or for some other reason?

“I just see customers starting to increase their orders just a little bit more and coming back on. Maybe they moved through some of those inventories that they had after that initial fall. I think every situation is a little bit different, depending on the geography you’re in and the market you’re serving in that respect.”

What do you see in the ethanol industry going forward?

“I think it’s going to be really interesting to watch how the ethanol industry responds throughout this recovery. Will we come right back on and blow right through those old production numbers and increase stocks again or will we take a more measured approach and a more disciplined approach? I’m hoping for the latter.

“Growth for the ethanol industry is not impossible, but I would say it will be challenging if we don’t have significant exports pick-ups and we don’t see a way to get ethanol into other countries and start to put it in their gasoline supplies because it does seem like the writing might be on the wall for electric cars over time.

“It’s going to take time. It goes back to production discipline and how we manage these plants going forward, what options can we come up with to make them profitable with other products and product diversification, and continue to use the U.S. corn crop.”

There have been reports that some ethanol companies have pivoted to producing hand sanitizers. Has that made a difference in the industry?

“I’ve seen it described as a band-aid or just something that can keep you going. It might even be more than that if we could ramp up. I know many plants are waiting on a more clarification from the Food and Drug Administration on what we’re allowed to produce and what we’re not allowed to produce. It’s a good thing. It shows that our product is very useful. The ethanol molecule has a very important place in the marketplace. I’m glad the plants are able to produce that sanitizer.”

The Health and Economic Recovery Omnibus Emergency Solutions Act passed in the U.S. House last month and awaiting action by the Senate authorizes the U.S. Department of Agriculture to provide 45 cents per gallon of ethanol produced from Jan. 1 through May 1, 2020. Producers forced offline for one or more calendar months during this time would qualify for the same credit, based on half the volume produced during the corresponding month or months in 2019. What are your thoughts on the HEROES Act?

“I guess it was good to see something for ethanol in one of these bills. Ethanol has largely been left out of the free money parade that goes on in Washington. It was good to see that we got recognized.

“It was good to see some money out there for infrastructure for high level blends. I think that’s been a slow, long road, but I do think we’ll see growth there. So, we’ve got to keep going on that path and try to offset some of these export losses that we’ve seen in the past and other demand losses.

“You can go back into 2018 and throughout most of 2019 and the industry was already struggling and just continued to keep production high as we saw demand start to falter. Obviously you can’t do that forever or you’ll see a significant problem with your margin. There’s a fair amount of time spent below the breakeven line when you’re in the ethanol industry and that’s why I try to make the point about the disciplined stance on production, and really take market cues.”

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