The US ethanol market is poised for strong demand at the beginning of 2022 as the industry continues to recover from low production and demand during the coronavirus pandemic, though logistical headaches remain a challenge.
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Unseasonably strong demand in the fourth quarter of 2021 pushed ethanol values and margins to multi-year highs, spurring output to pre-pandemic levels. Poor railroad performance, however, kept some plants from running at maximum output during the highest-margin period.
S&P Global Platts calculated the US ethanol cash margin at a seven-year high in November, peaking at $1.7531/gal Nov. 24. The margin averaged over $1/gal in the fourth quarter, up sharply from under 14 cents/gal in Q3 and a negative margin in Q4 2020.
Rail turnarounds present challenges
"We have trains sitting at our plants that aren't getting picked up for seven days from original release/planned ship date due to rail issues," said one source in mid-November. "Norfolk Southern and Union Pacific seem to be the most impacted at this time by Eastern manifest/unit trains and Southern unit trains to Texas."
Ethanol producers notify the railroad serving their plants when product is ready for pickup, but there's no guarantee of when the railroad will arrive for the rail cars and no timeline for when the cars will return from their trip to market.
Data from the US Surface Transportation Board showed the NS and UP railroads saw sharp increases in the second half of the year in the amount of time that ethanol shipments sat at their origins and the number of cars idling.
Ethanol unit trains on the NS spent an average of 38.2 hours in Q4 at their origin, up from 24.2 hours in Q3 and 29.5 hours in Q4 2020, according to STB data. Unit trains on the UP spent an average of 35.4 hours at origin in Q4, down slightly from 37.1 hours in Q3 but up from 27.7 hours in Q4 2020.
The number of rail cars loaded with ethanol that went at least 48 hours without moving also ticked higher for the NS and UP, averaging 183 rail cars and 67.5 rail cars per week in Q4, respectively. That figure was up sharply both on the quarter and on the year for the NS, while the UP's average was down modestly on the quarter but sharply higher on the year.
Other railroads have seen some increases in the same metrics, but none as pronounced as the NS and UP.
"This fall, Union Pacific experienced service challenges overall, not just with our ethanol business, because of weather and higher than average crew layoff rates, due in part to COVID-related absences," UP spokesperson Susan Stevens said in an email. "We are taking several steps to increase network velocity, including adding to our [train, engine, and yard service] workforce, transferring crews to targeted locations with increased volumes and we've returned more than 80 locomotives to the fleet since mid-October."
Norfolk Southern declined to comment.
Sources said the issues with railroads could take months to resolve, continuing to present challenges to ethanol producers trying to ship product to market in the early months of 2022.
Market looks for policy support
The US ethanol industry has also looked for renewed policy support from the Biden administration in the form of tighter compliance with Renewable Fuel Standard mandates.
The biofuels industry decried the Trump administration's use of small refinery exemptions from biofuel blending mandates as a means of lower ethanol blending.
In an early December announcement, the US Environmental Protection Agency proposed raising 2022 biofuel blending mandates. The higher 2022 mandates were largely expected, but the EPA also proposed denying pending small refinery exemptions.
The biofuel industry praised the EPA's plans to severely curtail the exemptions, which would keep biofuel blending much closer to mandated levels.
Strong demand on the horizon
With higher blending mandates and gasoline demand recovering from pandemic lows, ethanol market participants expect robust domestic consumption through at least the first half of 2022.
The strong domestic consumption comes alongside high export volumes, as the US continues to hover as the lowest-cost source of ethanol.
Increasing carbon emission mandates and ethanol blending programs have spurred additional interest in US ethanol, with producers developing export programs to various nations in recent years.
Exports are expected to continue into 2022, though bookings are dependent on US prices retreating from their Q4 2021 highs.