Across the commodities universe, the loudest rumblings are about the carnage in oil, Monday’s historic subzero prices for U.S. crude and how finding tankers to store oil is like finding ventilators in some countries for COVID-19 patients.
But there’s also another constituency in the raw materials space hurting from the demand destruction in energy now caused by the coronavirus. And that’s ethanol, the biofuel mandated as additive to motor fuels in many countries.
Ethanol’s voice has been almost drowned out by the din in oil.
“On the ethanol front, close to 30% of plants are idled, with declining gasoline demand crushing the biofuel industry,” said Dan Flynn, analyst at Price Futures Group in Chicago.
The reality is there is as much need to produce ethanol now as there is to make motorcar fuels. With half of the world’s 8 billion people under restricted mobility to control the virus’ spread, almost no one is driving unless absolutely necessary.
In the U.S. state of Minnesota, its largest ethanol plant Guardian Energy, which normally employs around 50 people, has closed the plant April from 2nd through May. CEO Jeanne McCaherty has been quoted saying: “We hope to reopen by June 1st, that’s a goal”.
Several other Minnesota ethanol plants, including four operated by Sioux Falls-based Poet, are running on reduced production levels. Poet, one of the largest U.S. ethanol producers, has idled two plants in Iowa and another in South Dakota. Another Minnesota ethanol maker, The Corn Plus co-op in Winnebago, closed in September, after losing $100,000 a week.
Randall Doyal, CEO of Al-Corn Clean Fuel, said the fuel market “is telling us to shutdown and not operate”. While continuing to operate was economically abysmal, he adds: “I am hardheaded and I don’t like (shutting down) as an answer, we are owned by farmers and they don’t like that answer either”.
There is a disconnect though between what is happening on the industry side and the publicly quoted prices of ethanol.
Ethanol futures, quoted once every few days on the CBOT due to the lack of daily volume, haven’t done too badly despite Monday’s oil crash, losing just 4% on the week. According to the latest quote from April 19, they were only at a one-month low of 86 cents a gallon. For the year though, ethanol futures were down 32%.
Stocks of major publicly-listed ethanol distillers like Archer-Daniels-Midland Company (NYSE:ADM), Valero Energy Corp (NYSE:VLO) and Green Plains Renewable Energy Inc (NASDAQ:GPRE) also haven’t lost much money this week.
Sugar at 12-Year Low, Corn 4-Year Bottom
Real pain is also being felt by cane growers in India’s prolific sugar state Uttar Pradesh and Brazil’s Sau Paulo, as well as farmers in the Corn Belt that stretches across the U.S. Midwest. These farmers are the ones who supply the agricultural feedstock for ethanol, the biofuel mandated as additive to petroleum in India and Brazil and gasoline in the United States.
Sugar prices on ICE (NYSE:ICE) Futures U.S. hit a near 12-year low of 9.55 cents a lb on Tuesday, losing 33% since the end of January. Corn futures on the Chicago Board of Trade struck a four-year bottom at $3.09 bushel, down 20% since the close of December.
Even before the start of April, Indian sugar mills had difficulty supplying domestic oil marketing companies with ethanol to be mixed into petrol and diesel, after drastic lockdown measures imposed by Prime Minister Narendra Modi’s administration took almost all non-essential traffic off the roads in the near 1.4-billion people nation.
This week’s horror story in oil — and the manic race by anyone in the physical crude business to find any place to store the commodity—from tanks to barges, VLCCs, pipelines and even rail cars — is going to make it worse for those producing agricultural feedstocks for ethanol.
“Concerns that ethanol production will not start to increase anytime soon is still a drag on (agricultural) futures prices,” said Clif Droke, a commodities specialist at Financial Sense Wealth Management.
“Weaker petroleum futures make higher-priced ethanol that much more expensive to blend and cuts demand,” Droke said, adding:
“There’s still a long way to go before ethanol processing becomes profitable again. That makes more sugarcane available for processing into sugar.”
Crashing Oil Just Hammered Another Nail Into Ethanol’s Casket
Dan Hueber, a veteran grains analyst in St. Charles, Illinois, concurred.
“Unfortunately, the action in energies weighed heavily on the corn market as well yesterday, as many assume another nail was pounded into the coffin of the ethanol casket,” Hueber wrote in a commentary that referred to Monday’s crash in oil.
The author of The Hueber Report on grains said it was difficult to argue with the logic of correlating lower corn usage with lower ethanol production.
Worst-Case Models Pushing Prices Below Realistic Levels
But he noted that it was also the norm for markets to build worst-case scenario models that pushed prices well below realistic levels.
“That is the position I believe corn sits in right now, and the price action throughout the balance of this month will be little more than market ‘noise,” Hueber said.
Crop scouts report that COVID-19 notwithstanding, farmers in the Midwest were already accelerating their seeding pace as warmer spring temperatures set in, adding to expectations for a massive U.S. corn acreage in the coming harvest.
"Farmers are already out in the fields, ignoring raindrops, and serious planting is expected to get done this week, on the order of a quarter of the crop," Charlie Sernatinger, global head of grain futures at EDF & Man, said in a note to clients.
The U.S. Department of Agriculture said on Monday farmers in the country had planted 7% of their intended corn area as of Sunday.
In sugar’s case, industry researcher Czarnikow Sugar recently forecast a 2-million-ton drop in global sugar consumption owing to the virus. In the note, analyst Ben Seed said aside from the consumption decline in the 2019/20 season, worldwide sugar consumption in 2020 was likely to be lower on a per capita basis.
Despite retail-level stockpiling of sugar — and hoarding by individual consumers — worldwide demand for the sweetener was expected to drop considerably due to restaurant closures, as well as fewer parties and celebrations owing to the pandemic, Droke of Financial Sense Wealth said. He added:
“Moreover, traders will need to watch for a potential increase in sugar supplies from Brazil in the next few months as its harvest season gets into full swing this spring."
“In view of these factors, a heavy cash position is recommended for now as we wait for the damage inflicted on the market by the coronavirus to abate."