With over two-thirds of US ethanol plants1 either idle or operating at below capacity due to the impacts of COVID-19, the industry is in dire need of support. At the beginning of the year, sales of corn-based ethanol were expected to reach the $23 billion mark, but estimates indicate that the final number might be about $10 billion lower.
The lower demand for fuel is a result of the vastly reduced amount of travel from COVID-19 restrictions. As a result, corn prices also took a big hit. Ethanol is a component in most types of gasoline, and the allowable percentage of ethanol in gas is typically about 10%.
While some producers who can demonstrate commodity price reductions of 5% in the January-April 2020 window are eligible for USDA CFAP price support, not all producers are in a position to take advantage of this funding.
Ethanol demand and corn prices
As a result of COVID-19, corn prices retreated to 2016 levels2 as of the beginning of Q2 2020. As of early July 2020, corn settled in the $3.40/bushel range, a slight increase from April levels but still mired in a cyclical trough. With ethanol production cut roughly in half, there are approximately 250 million bushels of corn3 that are not being put into fuel production. Without substitute sources of demand, the price of corn will continue to have downward pressure, especially with continued strained trade relations with China.
Demand may be picking back up
At the end of the second quarter, there may be a ray of good news if you are a corn producer. The US EIA (Energy Information Administration)4 saw an uptick in demand for ethanol, with some economists even predicting a V-shaped recovery. As COVID-19 restrictions began to ease, an uptick in demand for driving pushed down May 2020 ethanol inventory levels to the same amount as the prior year. This is a good sign for corn growers as demand for the crop should respond with higher prices moving into the last two quarters of 2020.
Exports recently surged for corn
Another sliver of optimism5 for corn prices comes as a result of the June 2020 USDA crop report showing producers greatly reduced the number of acres planted. Nearly five million fewer acres of corn were planted in June relative to expectations in March of 2020. Nevertheless, if you are a corn producer, it is advisable to keep an eye on the global supply and demand reports for the crop. There is optimism that prices will hold up through the end of the year, but they will vary significantly based on export demand and expected yields.
Perhaps the biggest piece of positive news is the surge of Chinese buying in the US corn market as of early July 20206. The first week in July represented a nine-year buying high, and the purchases were for both new and old crop corn.
Halderman Real Estate and Farm Management will use its 90 years of experience with corn and other crops to help inform growers about their operations and farmland ownership and leasing. More than ever, we are keeping a careful watch on factors that impact crop prices, and we look forward to speaking with you about the market.
Footnotes:
- https://www.agriculture.com/news/business/with-half-the-ethanol-industry-offline-sales-to-drop-10-billion
- https://www.marketwatch.com/story/corn-prices-fall-back-to-2016-levels-as-covid-19-lockdowns-cut-ethanol-demand-2020-04-03
- https://farmlead.com/blog/breakfast-brief/corn-prices-best-worst-covid19-scenarios/
- https://www.eia.gov/todayinenergy/detail.php?id=44015
- https://www.agupdate.com/agriview/markets/crop/corn-prices-increase-after-usda-surprises/article_43f61baa-e76e-554a-be06-dd88939f8fe4.html#tncms-source=infinity-scroll-summary-siderail-latest
- https://www.kmaland.com/ag/china-makes-big-purchase-of-u-s-corn-nine-year-high/article_7fbf1ccc-c206-11ea-a592-a38f5a603282.html
