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Outlook 2019: US ethanol facing same challenges in 2019 as in 2018

Houston — As US ethanol producers head into 2019, they face the same challenges that plagued the markets in 2018, particularly in the last half of the year. High production levels, which eroded margins while increasing the inventory level, are expected to force the producers to make some hard decisions.

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HARD TIMES IN 2018

Since July, ethanol markets have been hit hard with record-setting price drops. Since reaching a 2018-high of $1.5130/gal on April 20, Chicago Argo ethanol prices have plunged. The bottom came on December 10, when Chicago Argo ethanol reached $1.1725/gal, the lowest level since 2003, and the fourth-lowest price since S&P Global Platts began assessing ethanol that same year.

Toward the end of the year, reports surfaced that some plants, both in and outside the US Midwest, were either idling capacity or shutting down completely.

OVERSUPPLY AND DEMAND CONCERNS

Ethanol production, spurred by low corn prices and positive crush margins in the first half of 2018, exceeded the 1 million b/d milestone in all but two weeks in 2018.

The price plunge started with a resurgence of corn prices. After falling to the lowest levels in 2018 in mid-July, corn made a steady recovery in the last six months. On July 16, front-month CBOT corn prices settled at $3.4175/bu; on December 18, prices had risen to $3.8550/bu. Crush margins began to sag, falling below zero on September 20 and never recovered. However, ethanol production remained at historically high levels despite the falling margins.

Sources told Platts that ethanol producers were holding on, waiting for competitors to dial back production so they could take advantage of the resulting higher prices. One source described it as "a game of chicken."

At the same time, the high production rates have caused inventories to swell to record levels as well. If production doesn't substantially decline, sources said, ethanol prices will not fully recover.

On the demand side, US ethanol producers saw a substantial decline in exports to China, a former major buyer. US ethanol is now subjected to a substantial tariff from the Chinese government as part of the ongoing trade tensions between the two countries. Until the trade war is resolved, China isn't expected to be a major importer for US ethanol. However, ethanol exports are stronger year on year due to increased demand from countries such as Brazil and India. If China comes back, the exports could surge.

POLICY CHANGES

US ethanol markets will be also impacted by policy decisions made by the US government in 2019, especially the US Environmental Protection Agency's program to grant waivers to small refineries. Under the program, a refinery with a capacity of 75,000 b/d or less can petition the agency to waive its obligation to comply with federal blending mandates.

Biofuels supporters believe the waivers provide a back door for reducing blending mandates. The EPA has suspended the program for 2019 while it investigates the issues. However, the agency has not reallocated previously exempted volumes from previous years as critics have called for.

A potential benefit for the industry could come early in 2019. The Trump administration has said it will push forward a waiver that would allow sales of gasoline blended with up to 15% ethanol, known as e15, year-round. Currently, regulations prohibit the sales of e15 in summers due to clean air concerns. But the ethanol industry has long sought the waiver, and US President Donald Trump has promised to implement it as a sop to ethanol interests located in the US Midwest, where a sizable portion of the president's base resides.

A lot in 2019 will depend on factors that ethanol producers can control, which is production mainly, and on those factors they cannot, such as corn prices and government policy. But if the ethanol markets are expected to recover, one thing is certain: 2019 must be dramatically different than 2018.

-- Wesley Swift, wesley.swift@spglobal.com

-- Edited by Pankti Mehta, newsdesk@spglobal.com