20 Mar 2020 | 09:08 UTC — New Delhi

Poor ethanol prices to hurt US corn demand, but maybe not planting

Highlights

Lower corn-to-soybean profit ratio to favor corn planting

Corn use for ethanol could fall during 2019-2020

Prices of corn, ethanol to remain subdued amid COVID-19 concerns

New Delhi — The current historic low prices of ethanol may keep corn demand in the US low, but market participants said that might not deter farmers from planting corn in the upcoming season, which has already started in some parts of the country -- the largest producer and exporter of corn.

In Midwest, the biggest corn producing area in the US, corn planting typically begins in April. The Department of Agriculture expects area under corn in the 2020-2021 marketing year from September-August to grow 5% on the year at 94 million acres.

The biggest factor supporting corn planting is the favorable corn-to-soybean profit ratio, analysts said.

"Farmers are noticing cheap diesel for the coming season and little else. They will plant "something" and with the new crop ratio at 2.33:1, that's still corn," said Pete Meyer, head of grains and oilseeds analytics at S&P Global Platts Analytics.

The soybean-to-corn price ratio is used to quantify returns between soybeans and corn. Lower priced ratios indicate that corn is relatively more profitable than soybean.

The current ratio between corn and soybean prices is the weakest since 2016, favoring corn planting.

"Nothing matters except that ratio when planting starts," said Meyer. In fact, if the ratio stays where it is, corn plantings could go beyond 95 million acres, he added.

Collin Watters, director of exports and logistics at the Illinois Corn Marketing Board, echoed Meyer's view and said farmers will take the long view at planting and plant crops that have more profit potential.

According to Arlan Suderman, chief economist at INTL FCStone, some of the borderline corn production areas in the US are dependent on ethanol plants for their selling, and lower demand for corn for ethanol might impact planting decisions there.

However, that might not be the case for the major corn producing areas, he said.

"Farmers in Iowa and Illinois plant corn. That's what they do. They're always optimistic that they can out-grow their problems –- in other words, grow a great enough yield to cover their basic costs even at low prices. That's true of the rest of the core Corn Belt states as well," said Suderman.

The other planting option with farmers -— soybeans —- is not offering much either, considering the African swine fever is still destroying global demand and South America potentially producing record crops, added Suderman.

Demand may take hit

Ethanol prices in the US have sunk to historic lows, without any certainty of recovery.

Low gasoline prices, and an expected fall in fuel consumption amid COVID-19 concerns have all contributed to a cautious environment for ethanol demand, in turn lowering corn demand.

S&P Global Platts assessed Chicago Argo ethanol at 95.75 cents/gal on Wednesday, the lowest level since Platts began assessing the biofuel in 2003.

Ethanol plants have been unwinding hedges since March 13, an indication of plant slowdowns or shutdowns, and we should start hearing of plant closures by as early as next week, said Terry Reilly, senior analyst with Futures International.

"RBOB gas is trading at a discount to US ethanol futures, creating demand destruction throughout the industry," said Reilly.

"The growth of ethanol export [from the US] appears limited unless China emerges as a buyer," a report by the University of Illinois said. While it does not seem feasible that China imports ethanol at that level under current coronavirus issues, a moderate expansion of exports may occur under the Phase 1 US-China trade deal, the report said.

"Corn use for ethanol production faces the prospects of reductions during the 2019-20 marketing year without a fundamental change in current market demand projections," the report continued.

For the 2019-2020 marketing year, the US is likely to produce 13.69 billion bushels (347.8 million mt) of corn, of which 5.425 billion bushels is to be used for ethanol manufacturing, according to USDA.

Plummeting corn prices

Corn prices are low in the US at present due to demand disruption caused by ethanol prices and poor exports.

"Domestic corn basis is collapsing across the US," said Reilly. The average weekly corn basis was at 48 cents/bushel as of March 15, compared with 55.5 cents/bu in the beginning of this month and 58 cents/bu during the same period last year, according to Platts data.

Corn futures on the Chicago Board of Trade were also seen in the red, with the most active CBOT May corn contract hitting a multiyear low at $3.32/bu Wednesday.

Prices of corn are seen unlikely to recover amid the COVID-19 pandemic.

"Reduced travel will decrease fuel use, leading to less ethanol use, and potentially lower corn prices," according to another report from the University of Illinois.


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