The Coronavirus and Ethanol Demand Destruction

March 27, 2020

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by Scott Irwin and Todd Hubbs (FarmDocDaily) ... One implication of the virus-related restrictions is that people are driving much less than before, which means that gasoline and ethanol use are declining. The impact on the price of ethanol has been swift and severe, as shown in Figure 1. The price of ethanol at the Iowa plant level has declined $0.32 per gallon, or 26 percent, since late February. There is naturally great interest in the magnitude of ethanol demand destruction and the implications for corn ethanol use going forward. The purpose of this article is to investigate the potential level of ethanol demand destruction over the next few months and the associated impact on corn ethanol use.

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The approach we take here is based on the level of restrictions currently in place in every state in the U.S., making an assumption about the impact of the restrictions on miles driven and gasoline use, and then weighting the impact by the proportion of gasoline use represented by each state.

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Even when the reductions are assumed to be limited to March through May, the impact on annual gasoline consumption is substantial.

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The reductions in gasoline, ethanol, and corn use discussed above are based on the assumption that virus-related restrictions in place in late March stay in place through the entire month of April and then lessen in May. There is obviously considerable uncertainty whether this will turn out to be the case. To provides some perspective on a possible worst-case scenario, we re-do the analysis assuming that 80 percent of gasoline demand is represented by the shelter-in-place category and 20 percent is represented by the social distancing category. All other assumptions remain the same. In this alternative scenario, the total decline in gasoline use for the three months is 9.9 billion gallons, the decline for ethanol use is 999 million gallons, and the decline in corn use for ethanol is 345 million bushels. We could also consider scenarios that lengthen and shorten the amount of time that the restrictions are in place, which would correspondingly increase and decrease the projections of demand destruction.

As a final step in the analysis, we examine the signal that the market is providing to ethanol producers to shut down production. READ MORE

3bn gallons of fuel ethanol idled, some plants switch to industrial production - RFA (Independent Commodity Intelligence Service)

Valero Halts Some Ethanol Production -- Gasoline Demand Hits From COVID-19 Affect Iowa, Nebraska Ethanol Plants (DTN Progressive Farmer)

Low Demand Leads The Andersons to Idle Ethanol Plants (Powder & Bulk Solids)

Rex idles NuGen plant, explores carbon sequestration project (Ethanol Producer Magazine)

U.S. Ethanol Demand And The COVID-19 Pandemic (Seeking Alpha)

U.S. refiners sell biofuel credits to raise cash as valuations tank (Reuters)

Ethanol Industry Facing A Perfect Storm (KXLG)

Cuts to ethanol production weigh heavily on corn market (Real Agriculture)

Gasoline demand expected to fall by 50 percent in wake of coronavirus: analysis (The Hill)

Siouxland Ethanol to suspend production in April, citing plummeting fuel demand (Sioux City Journal)

Siouxland Ethanol will be suspending ethanol production in April 2020. (Siouxland Ethanol)

Green Fuel Plants Are Shutting Down and Some May Never Come Back (Bloomberg)

HUGE LOSSES FOR ETHANOL INDUSTRY (KDHL)

Ethanol Plants Could Soon Start Producing for DDGs, Not Ethanol (Farm Journal AgWeb)

U.S. crude dips below $20 as lockdowns hit demand (Reuters)

Ethanol may be the loser amid cheap gas and an oil glut (Green Car Reports)

GRAINS-Corn slumps as ethanol makers feel coronavirus constraints (Reuters)

Energy bust threatens farmer earnings (Argus Media)

Pacific Ethanol's Restructuring Comes At A Terrible Time (Seeking Alpha)

Marquis: Ethanol plant will endure and boost community -- Low oil prices, COVID-19, tariffs won't stop Hennepin plant (News Tribune)

Marquis Energy continues operations during COVID-19 pandemic (Ethanol Producer Magazine)

COVID-19 reduces demand for fuel, ethanol plants cut production (Ethanol Producer Magazine)

The Oil Glut Is Getting Critical (Wall Street Journal)

A Pandemic, a Price War, and the Future of America's Oil Industry (OurEnergyPolicy)

Shocking drop in wholesale gas prices signals more refinery cutbacks and gasoline under $1 (CNBC)

S.D. ethanol industry and corn growers facing economic ‘bloodbath’ due to COVID-19 (Redfield Press)

Side effects: Fuel demand crash shuts US ethanol plants, meatpackers lack refrigerant (The Poultry Site)

Corn Futures Slip on Record-Low Ethanol Production (Market Screener)

Ethanol and Corn Producers Struggle While Country Stays Home (Atlantic News Telegraph)

Farmers face uncertain future amid global pandemic (1011 Now; includes VIDEO)

GRAINS-Corn futures slump as ethanol production hits decade low (Reuters)

State’s ethanol industry, corn growers facing economic free-fall (Brookings Register)

Excerpt from Independent Commodity Intelligence Service: The Renewable Fuels Association (RFA) predicts that 3bn gal of ethanol capacity has been idled or will idle in the next several days as the coronavirus (Covid-19) continues to dampen gasoline and fuel ethanol demand.

"We believe between 30-40 plants are fully idle and another 40-50 have reduced output," said Geoff Cooper, CEO and president of RFA.

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While some plants cut production, others have the ability to shift to industrial ethanol as the need for sanitzers increases.

Making industrial alcohol from ethanol requires a further step in distillation, so not all fuel ethanol plants are able to accomplish this.

It also requires permits from the US Food and Drug Administration and the federal Alcohol and Tobacco Tax and Trade Bureau. READ MORE

Excerpt from Seeking Alpha: The ethanol sector is backed by the U.S. revised Renewable Fuel Standard [RFS2], which requires that specific volumes of different biofuels be blended with refined fuels every year. This has provided the sector with an important demand backstop during past periods of low gasoline prices.

This demand backstop is not functioning properly at the moment due to a quirk in the rulemaking procedure that the U.S. Environmental Protection Agency [EPA], which administers the blending mandate, utilizes. Specifically, when the EPA finalizes in Q4 the blending volumes for the subsequent year, it does so by taking the absolute statutory volumes and dividing them by expected refined fuels demand to calculate average percentage standards. Given that the COVID-19 outbreak didn't even begin until after the EPA had finalized its rulemaking for 2020, the denominator that it used was much higher than what is currently being used. Ethanol demand under the RFS2 has therefore recently declined in line with gasoline demand.

This does not, however, mean that mandated ethanol demand is completely tied to gasoline demand. The timing of the EPA's rulemaking is critical to understanding how ethanol demand will be affected by the COVID-19 pandemic moving forward. Specifically, the EPA's rulemaking for 2021 will be based on the U.S. Energy Information Administration's October 2020 projection of 2021 refined fuels demand. If the largest peak in COVID-19 cases does not occur until late 2020/early 2021, as researchers at the Imperial College London have forecast, then the EPA's denominator, expected refined fuels demand in 2021, will shrink relative to the statutory blending volume for that same year. This will mean that ethanol demand in 2021 will rebound to a level that is more similar to that of 2019 than 2020. This will also likely cause the mandated ethanol blending volume to exceed what the infrastructure is able to handle, perhaps by a large margin. The EPA's proposed 2021 rulemaking, which is to be released in Q2 2020, will be the first indication of such a development.

The RFS2 also contains a separate mechanism that may also cause ethanol demand to be partially separated from gasoline demand. The blending of biofuels with refined fuels under the mandate generates tradable compliance commodities known as Renewable Identification Numbers [RIN]. Obligated blenders such as refiners are allowed to bank RINs for use in the following year. RINs are only generated via blending operations (1 gallon of ethanol equivalent generates 1 RIN), so demand for ethanol can be effectively shifted forward one year via the RIN banking mechanism. It may become rational for refiners selling into those states that are capable of handling >10 vol% ethanol blends to blend (and generate RINs) as much as possible now in preparation for the possibility of much higher RIN prices in 2021 should widespread social distancing measures either remain in force or be re-implemented in Q4.

There is some evidence that such demand shifting is already occurring. The price of the D6 RIN category that corn ethanol generates has increased from $0.17 on March 18 to $0.31 on March 25 (see figure). This has been accompanied by a sharp increase in the price of ethanol relative to gasoline, absolute declines to both prices notwithstanding (see second figure). Ethanol prices are low, in other words, but they would be lower still without the mandate.

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It has been calculated that the White House's SRE expansion ultimately reduced total RIN demand by almost 2.5 billion through the end of 2019. The court's ruling effectively reallocates approximately 0.8 billion of these waived RINs to 2020. READ MORE

Excerpt from Reuters: Refiners that sold off credits last week include Monroe Energy, which co-owns a refinery with Delta Airlines in Trainer, Pennsylvania, and Delek US Holdings, which owns refineries in Texas, Louisiana and Arkansas, according to market participants.

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U.S. renewable fuel credits fell for three sessions straight last week to as low as 12.75 cents each, traders said. They have since rebounded, to trade at 23 cents each this week.

One other factor pushing RIN prices higher this week was the U.S. Environmental Protection Agency’s decision to not appeal a court ruling that is expected to dramatically change refiners’ obligations to blend biofuels into the fuel pool.

Delek US Holdings shares have fallen 56% since the beginning of 2020. In the same period, PBF Energy is down 73%, Par Pacific is down 64%, and Marathon Petroleum is down 48%.

Goldman Sachs noted that given the extent of the demand destruction so far in 2020 and a lower crack spread environment this year than in 2009, Delek’s leverage is elevated.

Delta’s Trainer refinery, which is optimized to produce jet fuel, cut capacity by 40,000 barrels per day earlier this week as the airline announced it was reducing overall flights by 40% due to the coronavirus pandemic. READ MORE