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Feature: US ethanol producers eye uncertain future after earnings show financial damage from pandemic

Highlights

US producer earnings take a hit from pandemic

Fundamentals show signs of improvement

Long-term outlook uncertain; consolidation mooted

Houston — Earnings for major US ethanol producers took a hit in the first quarter of 2020 as the coronavirus pandemic slashed fuel demand across the country, and the globe. Now those companies are looking ahead nervously – not unlike many other sectors – at how their post-pandemic world will be reconfigured.

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Valero, ADM, Pacific Ethanol, The Andersons and Green Plains Renewable Energy reported their Q1 earnings in the past two weeks. All of the company's ethanol units posted losses.

Valero's ethanol unit posted an operating loss of $197 million in Q1. ADM's Vantage Corn Processors unit posted a $31 million operating loss. Pacific Ethanol saw a $12.9 million operating loss. The Andersons' ethanol unit posted an operating loss of $29.4 million and Green Plains posted an operating loss of $54.3 million.

A PERFECT STORM

Green Plains CEO Todd Becker, during the company's Q1 earnings call, said the ethanol industry was already being hammered by a slump in motor gasoline prices due to the stalemate between Russia and OPEC over crude production.

Then the pandemic hit, and with it the shelter-in-place orders that undermined fuel demand.

"Combined with the macroeconomic impact from the crude oil situation and then you have a perfect storm," he said.

Even before the pandemic forced millions of people across the US to leave their cars in the garage or driveway as they were forced to stay home, prices for benchmark Chicago Argo ethanol had fallen steeply from a 2019 high of $1.70/gal in late November.

As stocks swelled in late 2019 and into 2020, S&P Global Platts assessed Chicago Argo ethanol at $1.3580/gal on February 14.

Then came the pandemic, and with it a rash of shelter-in-place orders. All of sudden, residents virtually abandoned driving, and demand for motor gasoline plummeted. With no need for gasoline, the demand for ethanol cratered as well.

The market reaction was brutal and swift. Chicago Argo ethanol plumbed historic depths, reaching 84.60 cents/gal on the last day of the quarter. A day later, Argo hit a historic low of 81.05 cents/gal.

The plunge in prices drove margins, already negative for much of 2020, even further into the red. The ethanol crush margin, which measures the difference between ethanol prices and feedstock corn costs, fell to minus 36.90 cents/gal by the end of March.

In response, ethanol plants, some already burning through cash, rapidly reduced production or shut down altogether. The Renewable Fuels Association, a US ethanol industry trade group, estimated in April that at least 70 plants had shut down and at least the same number had greatly cut back their production.

SIGNS OF LIFE

But as summer nears, ethanol executives see the frozen US economy beginning to thaw.

As several states have eased quarantine restrictions, residents have returned to their vehicles and the road. According to US Energy Information Administration data, the weekly average of finished motor gasoline supply – a barometer of the demand for gasoline – has risen for five straight weeks.

Gasoline demand for the week that ended May 8 was 76.30% of that from March 13, the week that the World Health Organization declared the coronavirus a pandemic. That was up from 52.33% of the March 13 week average in the week that ended April 3.

Ethanol production, after taking a swan dive in March and April, has climbed as well. EIA data show production rose for two consecutive weeks, from 537,000 b/d in the week that ended April 24 to 617,000 b/d in the week that ended May 8.

The slump in production also forced ethanol users to cut into swollen inventories too. Stocks have fallen in each of the past three weeks, with two weeks seeing drawdowns of more than 1 million barrels.

Crush margins have rebounded as well. After bottoming out on April 2, the crush margin has trended upward, gaining 1 cent there and 1 cent there. But on Monday, the margin broke into positive territory at 1.15 cents/gal, its highest level since December 24.

"The recovery has been significant in the last few weeks, with recent stay-at-home orders beginning to relax and states beginning to reopen for business, the immediate effect has been positive albeit at production margins that are still challenging," Pacific Ethanol CEO Neil Koehler said during the company's Q1 earnings call. "Since the demand lows of April, we have seen demand increases of over 40% and three consecutive week declines in overall ethanol inventories."

LONG-TERM IMPACTS

While the ethanol industry shows signs of recovery in the short term, ethanol company leaders are uncertain how the industry will look long term.

Some ethanol plants have begun coming back online or ramping up production. But not all. As of May 15, the RFA said that more than 60 plants were still completely idled, and 75 to 80 plants were running at reduced rates.

And many of those plants were already hurting financially prior to the pandemic, as falling margins were making their future tenuous at best. Those are the plants that may not re-open any time soon, if at all.

"It depends on how quickly margins rebound," said Juan Luciano, CEO of ADM. "But I would say if there is a prolonged activity or low gasoline prices and margins continue to be down for a while, I think, you will see some players not coming back."

"Whether that's enough to restructure the industry is probably a tall order question there that I would not guess to answer at this point," he added.

The industry is seeking help from the federal government. A bill passed by the House of Representatives last week includes direct assistance for the biofuels industry. The bill faces an uncertain future at best in the Republican-controlled Senate. However, RFA officials said last week they were confident that the biofuels industry has supporters in the upper chamber on both sides of the aisle.

Any restructuring could include companies gobbling up plants as some firms exit the business. According to S&P Global Platts Analytics, consolidation has been a recurring them in the ethanol industry when faced with tumultuous times.

The pandemic "will not be ethanol's last dance; however, structural changes to ethanol could be coming given the financial carnage over the past two years," Platts Analytics said in an April 24 report.