Feature: US ethanol market wonders what's next after US price crash

Just where is the bottom? That's what the ethanol industry is wondering, after seeing the price for ethanol at Kinder Morgan's Chicago Argo terminal, the dominant US hub for ethanol trading, tumble by nearly 18% to historic lows in March.

On Monday, S&P Global Platts assessed Chicago Argo ethanol at $1.04/gal, the lowest assessment since Platts began the assessment in 2006. Argo ethanol had sunk 14 cents in one day, leaving a sea of red. It was the latest blow to an industry already reeling from collapsing prices.

"We are all just stunned," the broker, a 20-plus year veteran of the ethanol market said Thursday, when Platts assessed Argo ethanol at $1.1775/gal, a level that was already eye-popping. "I've been trying to get people off the ledge."

Then, things got even worse.

A combination of coronavirus-related demand fears and a price war in crude oil between Saudi Arabia and Russia have pounded global energy and agricultural markets. Gasoline prices have staggered to under $1/gal, pulling ethanol along with it. Ethanol margins have sunk further below zero, meaning many ethanol plants were losing money on each gallon of the biofuel they cranked out.

Market sources described the reeling prices in terms such as "stunning," "head-spinning" and "historic," and not in a good way. Liquidity, which was already on the decline in 2020 due to low prices and lower demand, dried up to near nothing. Traders didn't crack wise or use gallows humor. There just weren't words to adequately describe what was happening.

Now, the market is pondering just where it will end.

STAYING HOME

The problem, at its heart, is about demand.

As the coronavirus spread rapidly across the globe, governments have asked – and in some places, required – people to stay home in an attempt to contain the disease and slow its transmission. That means fewer people driving cars, fewer gallons of gasoline sold, and less ethanol needed to be blended into that gasoline.

Winter is already a low demand season for ethanol. It's a season that sees less driving that the peak summer months, and gasoline usually ebbs. Demand usually picks up in spring, as warmer weather encourages more driving. That may not be the case in 2020. No one can say for sure just when the people will be leaving their homes like they usually did. And that's created angst and worry among ethanol traders.

"The only thing I've seen like this for demand destruction is 9/11," the broker told Platts, referring to the 2001 terrorist attacks which grounded airlines. "But that was short-term."

Another market source said he had heard estimates that motor gasoline demand would fall 15% in 2020.

S&P Global Platts Analytics on March 10 stated that it now expects ethanol will make up 10.22% of the total U.S. gasoline pool in 2020, down from 10.32% previously.

Commodity markets related to ethanol are already reflecting expectations of a severe decrease in ethanol demand. Front-month CBOT futures for corn, the primary feedstock for ethanol in the US, have dropped 32.25 cents since March 4, settling Monday at $3.5475/bu. According to the most recent data from the US Department of Agriculture, nearly 40% of the 2020 corn crop is expected to be used for production of ethanol and its byproducts.

Prices for one of those byproducts, dried distillers grains, have shot up in recent trading. The left over portion of corn used after ethanol is produced, DDGS are a popular ingredient in livestock feed. Channahon DDGS since March 2 have jumped from $164/st to $176/st. Sources have said that the increase is due to expectations that ethanol production will fall, meaning less DDGS will be available on the market.

ALREADY ON SHAKY GROUND

To be sure, there will still be a market for US ethanol. The federal government mandates that ethanol be blended into gasoline, and those rules will still remain. But the question now becomes just how many producers will still be around to produce the biofuel when the smoke clears.

A market source told Platts that many ethanol plants are seeing prices below $1/gal, a level that makes production a virtually losing proposition.

The crush margin for ethanol has dropped precipitously in March. Already well below zero, on Monday the crush margin – which measures the cost of ethanol against the cost of feedstock corn – fell to minus 22.70 cents/gal, the lowest level since Platts began publishing the number in 2016.

"It would be prudent to just shut down," the market source said.

Another trader, based in Texas, said that margins could keep dropping. "Regardless of what margins are now, it's going to get worse," he said.

The ethanol crash comes at a time when the industry was already on shaky ground. Since mid-2019, ethanol stocks have been building, as producers took advantage of then-high margins to pump out as much ethanol as possible. Production would drop a bit when margins fell, but would resume when they recovered.

Ethanol executives preached discipline in production, saying that the industry needed to better match supply with demand. But that discipline was sorely lacking. Domestic oil production in 2020 has averaged 1.057 million b/d, far exceeding the estimated demand of 1.01 million b/d. And production didn't ease when margins dropped to below zero again in late 2019 and persisted into 2020.

By the time of the National Ethanol Conference in February, traders were predicting that many plants were already having cash flow problems. This year, they told Platts, was expected to be another hard one for ethanol producers.

And now, with the pandemic, demand could be shrinking much lower.

And with ethanol prices far exceeding those of gasoline, blenders will lose any incentive to blend more than just the required amounts of ethanol.

While few plants have closed yet, many in the market expect that many such closures are inevitable.

"We're gonna be losing plants in short order," one source told Platts Tuesday, a day after the pricing bloodbath. With the spring maintenance season fast approaching, some of those plants may close and never reopen.

Those that remain will have most likely face an industry that looks far different from today.

"These are historic times, man," said the trader from Texas. "If you live through it, you'll remember it."