U.S. ethanol prices, after nearly a year-long funk, are indicating strength for 2020.On Monday, March 9, ethanol prices tumbled with the rest of the broader energy and financial markets on the back of concerns related to the coronavirus disease 2019 (COVID-19) and its implications. Ethanol futures traded at their lowest levels in the nearly 14-year history of the contract that day and settled just a penny above the record-low settle. This blog explores U.S. ethanol market dynamics and perspectives outside of the unknowns brought into the picture by COVID-19.
Ethanol margins dipped into negative territory for spurts of 2019 for many producers. Weakness was largely brought on by continued over-production, oversupply and a dip in exports from 2018's record year.
Many ethanol producers in 2019 were forced to make difficult decisions as ethanol prices plummeted. Some reduced production rates, some were forced to temporarily idle production, while a few were forced to shutter operations entirely.
Ethanol Price Per Gallon: 2019 Perspective
Here’s a breakdown of the tough ethanol price environment in 2019.
The Energy Information Administration (EIA) data showed ethanol production rates soared to 1.096 million b/d in the week ended June 7, 2019, just under the all-time high of 1.108 hit in December 2017.
Seven weeks later, U.S. ethanol stocks hit an all-time high of 24.468 million bbl.
Two weeks later, ethanol spot prices at the key Chicago Argo hub were around $1.26/gal, within a dime of a 13-year low hit in December 2018.
As a result of the low-price, low-margin environment, production rates slowed to a three-year low of 943,000 b/d in the week ended Sept. 20. For the first time since 2016, production rates held below 1 million b/d for five-straight weeks, a period that was prolonged enough to help rebalance supplies, which hit a three-year low of 20.277 million bbl in the week ended Nov. 22.
Supplies shed 17% over the course of five months, helping prices rebound and margins return in December 2019.
Entering December, margins at a typical Iowa plant hit 2019 highs of over 30cts/gal, far above the 2019 average to that point of less than 5cts/gal.
Of the 1.029 million b/d of average ethanol production in 2019, domestic consumption in the form of the weekly refiner blender net input rate accounted for roughly 919,000 b/d, according to EIA's weekly refiner and blender net input of fuel ethanol.
With production rates down and input demand up, the need for rampant exports to keep the industry afloat tapered some from 2018’s all-time highs.
Brazilian & Canada Ethanol Remained a Factor; China Is 2020 Wildcard
Looking ahead to 2020, several factors will be important to monitor regarding the U.S. ethanol market outlook.
On exports, Brazil and Canada accounted for over half of the demand from abroad in 2019, but the industry spent last year eyeing its white whale for exports, China.
With the trade wars between the Trump administration and China dominating export market headlines throughout 2019, the industry entered the 2019 holiday season with a finalized deal that included ethanol still high on its wish list.
As 2020 unfolded, economic concerns surrounding the coronavirus added to uncertainties.
Ethanol’s price-per-gallon relationship to gasoline will also be monitored.
The steep discount to gasoline that ethanol enjoyed for much of 2019 began to narrow late in the year and could become problematic for growth in E85 and E15 adoption by consumers if the trend continues.
The industry rejoiced in May 2019 after the Environmental Protection Agency (EPA) finalized a rule to make good on President Donald Trump's promise to deliver a year-round RVP waiver for E15 by the 2019 summer driving season.
If gasoline prices continue to pressure ethanol and Renewable Identification Number (RINs) credits prices remain near multiyear lows, the U.S. ethanol industry could again struggle to find new demand for higher blends in the domestic market in 2020.
Want more 2020 analysis? Check out this blog for a carbon credit market outlook.