Biofuels expect hard hit with reduced travel

Gasoline consumption decline could mean lower corn prices

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Glacier FarmMedia – COVID-19 is expected to bring trouble to the biofuel sector and that is already depressing corn and other grain prices.

“Biofuel producers are under desperate strain,” Emily Skor, chief executive officer of Growth Energy said in an email.

“This is unlike anything we’ve seen before.”

Why it matters: Ethanol has put a floor under crop prices in North America, especially for corn, and reduced demand could influence crop returns.

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Growth Energy is the leading biofuel trade association in the United States.

“Between fuel demand dropping, government uncertainty from refinery exemptions and an expected economic downturn driven by coronavirus, a vast number of plants are operating in the red right now,” said Skor.

The ethanol industry was expected to consume 5.43 billion bushels of U.S. corn in 2019-20, according to the U.S. Department of Agriculture. That would be 40 per cent of last year’s production.

Demand from the sector has a major impact on corn prices, which in turn influences other grain and oilseed prices.

Todd Hubbs, assistant professor of agricultural commodity markets at the University of Illinois, said U.S. ethanol manufacturers are still producing about one million barrels per day, which is about the normal volume.

But that will likely change in a hurry due to slumping demand for gasoline due to COVID-19 restrictions. U.S. gasoline includes about 10 percent ethanol.

“It depends on how long this goes on but we could see somewhere between a 15 and 20 per cent cutback on gasoline consumption,” said Hubbs.

“With everybody pulling back on trips and working from home, it looks like we’re going to be in that range.”

If gasoline consumption falls by that amount over the next two months it could reduce 2019-20 corn consumption by 120 to 170 million bushels.

Hubbs believes that potential reduced demand has already been factored into corn prices.

“We’re talking an almost 50 cent price drop in a matter of two weeks,” he said.

“It has been a hard run down.

“I hope to see all of this stuff bottom out in the near-term,” said Hubbs.

“It feels like we’ve taken a lot out of these markets.”

But he added that it is difficult to predict grain markets in such a volatile environment.

The hope is that cheap corn prices will cause an increase in export sales that will help offset the anticipated losses in ethanol demand.

Hubbs said there has been an uptick in weekly export numbers but the pace of exports still lags behind the USDA’s 1.725 billion bushel forecast for 2019-20.

A lot is going to depend on what happens in Brazil. The USDA forecasts a 3.98 billion bushel corn crop in that country with 2.88 billion bushels of that occurring in the safrinha or second crop.

The safrinha crop is being planted late in Parana, Brazil’s second largest corn-producing state and the forecast calls for dry weather during the critical months of April and May.

“A short crop in Brazil would pull down world supply and provide reduced export competition this summer for U.S. corn,” said Hubbs.

This article was originally published at The Western Producer.

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