Ethanol Plants Are on the Verge of Shuttering Production; Here’s Why

Ethanol Plants Suffer 032020
Gasoline prices are falling, but few can take advantage of the low prices due to “social distancing” and increasingly stringent COVID-19 prevention restrictions. That means less ethanol demand, too. ( Farm Journal )

Gasoline prices are dropping, which is normally welcome news by drivers. But few can take advantage of the low prices as “social distancing” and increasingly stringent COVID-19 prevention restrictions are keeping people off of the roads. As fewer drivers get behind the wheel to go to work or run daily errands, it’s already eating into ethanol outlooks, with some ethanol plants considering shutting down, and one ethanol leader saying the industry is in “dire straits.”

Sen. Chuck Grassley (R-IA) took to Twitter this week and acknowledged the issue, saying if oil companies receive a bailout, so should ethanol and biodiesel plants.

Government assistance or not, Seth Meyer, an economist with the University of Missouri, says less demand means some plants could shutter production this year.

“I think if what we're hearing anecdotally about people driving less and the falling gasoline demand is real, and I think we'll see some ethanol plants close,” says Meyer. “The question will be, ‘is that for a month? Is it for two months? Is it throughout the summer driving season?’ I think those are the big unknowns, but it wouldn't surprise me to see some ethanol plants either slow or shut down production with the fall in gasoline demand.”

Much of agriculture is dealing with the same timeline unknowns. Meyer says when it comes to ethanol and gasoline demand, cheap oil isn’t good for ethanol demand, and neither is the fact fewer people are driving.

“The way the Renewable Fuel Standard (RFS)  works is if folks drive 1% less, it means the effective demand for ethanol is 1% lower,” he adds. “I think on top of that, export markets are going to be a real struggle given the relative ethanol and gasoline prices. Unless those exports are supported by a policy overseas, folks are going to buy gasoline instead.”

Assumptions surfaced late last year that China may start to buy U.S. corn or ethanol this year in order to help fulfill its $40 billion trade promise. However, that may be a long shot. And with wanting domestic demand, and without any export markets possibly stepping up, Meyer says the only hope for ethanol is resurfacing demand in 2021.

“If there's an opportunity for folks to say, ‘hey, gasoline is really cheap, I'm going to go and I'm going to take a trip,’ [that would help], but until we see a change in people's gasoline usage habits with oil so cheap, I think it's going to be a struggle until we get to 2021, and the RFS is reset again.”

Concerns of waning ethanol demand and plants possibly shutting down, means corn could have weaker demand in 2020, as well. Meyer says that is possibly weighing on producers’ minds as they debate what to plant this year.  

“That's why I think this is going to be a such a tough decision for producers going into planting,” he adds. “The corn/soybean price ratio was about the same as last year, but some of the inputs have been cheaper. I think those marginal acres that those producers are thinking about shifting around, we could have some changes there. Folks were very optimistic about corn acreage, maybe there's some pullback on that from what we're observing."

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