US gasoline rebound raises hope of rapid recovery for US ethanol

The rapid recovery in US gasoline demand is raising hopes that the hit to the country’s ethanol sector – a major consumer of corn – will be short-lived, despite up to half the country’s entire production capacity currently being offline, trade sources have told Agricensus.

The rebound suggests driving demand is recovering rapidly despite lockdowns still being evident in many states.

“Gasoline consumption is recovering faster than expected, the ethanol industry is starting to ramp back up,” one market source said, putting his outlook for 2020/21 marketing year corn to ethanol use at 5 billion bushels (127 million mt).

A second US-based analyst confirmed he is expecting corn used to make ethanol to hit 5.15 billion bushels (131 million mt) next year, higher than this year’s consumption which he expects will come in around 4.7 billion bushels (119 million mt).

With the USDA set to reveal its 2020/21 expectations for the world’s agriculture supply and demand next week, recovering road fuel demand re-writes some of the assumptions around US corn use and diminishes the likelihood of a major contraction in demand leading to a huge build in ending stocks.

That will be key in alleviating some of the pressures that corn futures have faced in recent weeks as ethanol plants shut down, and will go some way towards relieving the pressure the complex may yet face as US farmers plant a corn crop that could top 400 million mt.

“From what I’m hearing, most furloughed plants are planning or trying to pop back up in August,” Kelly Herrick of Advance Trading told Agricensus as a sharp increase in gasoline use has raised hopes that the US motorist is shrugging off lockdowns to get back on the road.

Road fuels hit

US finished gasoline supply plunged from 9.6 million barrels a day in the week ending March 13 to just over 5 million b/d in the first few days of April, a near 50% fall according to Energy Information Administration data.

Supply has rebounded since early April though to hit 6.6 million b/d last week, a 31.6% recovery in less than a month, raising expectations that ethanol, which typically contributes 10% of finished gasoline, should also see demand rise.

Ethanol production had already started declining from the final week of February as margins were beaten thin by stable ethanol prices and a hike in corn prices, slumping from 1.08 million b/d in the week of February 28 to hit a low of 537,000 b/d in the week of April 24 – down 50%.

By late April, biofuel lobby groups estimated that up to half the entire country’s ethanol production was offline – with Todd Becker, CEO of US ethanol producer Green Plains, estimating that up to 20% of the sector had chosen a full ‘cold’ shutdown.

Becker said during the Green Plains first quarter earnings call that facilities could take up to a month to restart once choosing to cold shutdown, while facilities that had chosen to furlough staff could face other legal complications before restarting.

Road to recovery

Nonetheless, this week saw the first climb in ethanol production rates for nine weeks, with EIA data showing production rising 61,000 b/d to 598,000 b/d, while stock levels continued to decline and production margins rally.

“I could see us still achieving around a 90% type corn demand in ethanol next year,” Herrick said, assuming that a second wave of Covid-19 outbreaks doesn’t occur and trigger a further stringently observed lockdown across the US.

GPS data from TomTom suggests that, while major cities such as Los Angeles and New York continue to report significantly lower driving levels, smaller cities across the US are reporting activity levels that are closer to 2019 averages – particularly at weekends.

Data for Phoenix, Arizona and Birmingham, Alabama, are also starting to show signs of morning and evening peaks Monday through Friday, suggesting a return to working routines.

“It’s such a fine balance – spot margins are on the cusp of bringing production back online and a cheap (corn) basis could really help the economics, but how cheap could ethanol get?” Herrick asked, although co-products such as DDGS could help in the decision to restart.

“We have way too much demand for the co-products of the ethanol process to keep a 50% run rate in place for an entire season,” Herrick said.