COVID-19 has dropped gasoline demand as people stay at home and travel is stalled. An OPEC oil price war has an already oversupplied market facing more production. These two storms of increased supply and diminished demand have combined to put the ethanol industry deep in the red. Aimpoint Research has previously highlighted that the growth of electric vehicles could drastically reduce the use of the liquid fuels within the decade. The COVID pandemic and oil price war could very well accelerate this prediction.
Most estimates indicate that gasoline demand will decline by 15-20% over the next few months. The spot ethanol price has reached its lowest level since 2003 and is on track to reach an all-time record low. The Renewable Fuels Association estimates that ethanol producers are losing 25 cents per gallon at today’s spot basis price. We have begun to see ethanol plants reduce production or become idle. As reported in Agri-Pulse, POET, the world’s largest producer of biofuels, has suspended corn purchases at a number of the company’s ethanol plants.
The Renewable Fuels Association (RFA) published that approximately 200 ethanol plants produce over one million barrels of ethanol per day. The rippling effects are just beginning which include lost jobs, limited access to the ethanol by-product dried distillers grains with solubles (DDGS), and potential lower corn prices from lost future ethanol demand.
ABF Economics released that 350,000 workers are employed in the ethanol industry directly or indirectly. This current dynamic challenging ethanol will have a profound effect on several rural communities.
According to the USDA Economic Research Service (ERS), 38 million metric tons of DDGS are produced annually. A precipitous drop in ethanol production will force livestock producers to quickly adjust rations.
Lower Corn Prices
Corn prices are likely to drop due to future lost ethanol demand.
As part of our Executive Intelligence Network, Aimpoint Research has been tracking electric vehicle technology, adoption rates and potential impacts to the agri-food value chain. The International Monetary Fund estimates that by 2042, 37-93% of all vehicles in the United States will be electric.
- The U.S. Energy Information Administration (EIA) estimates that in 2018, the 142.86 billion gallons of finished motor gasoline consumed in the United States contained about 14.38 billion gallons of fuel ethanol, equal to about 10% of the total volume of finished motor gasoline consumption.
- If electric vehicle adoption increases according to the fast-adoption scenario as estimated by the International Monetary Fund, liquid fuels would be displaced by nearly 2 billion gallons by 2025 and 128 billion gallons by 2042.
- If ethanol’s market share were to remain at 10% of liquid fuels, ethanol will be down 200 million gallons by 2025 and down nearly 13 billion gallons by 2042.
One small positive development for ethanol brought about by COVID-19 is the surging demand for hand sanitizer. The Alcohol & Tobacco Tax & Trade Bureau has issued guidance that provides added flexibility for alcohol fuel plants and beverage distilled spirits plants to shift to the production of ethanol-based hand sanitizer. This high growth market in response to the pandemic threat will increase production of hand sanitizers or other health-related sanitizing products from ethanol to meet the demands.
Corn is America’s largest crop, and the ethanol industry is a vital market for U.S. corn farmers. USDA ERS reports that ethanol production represents approximately thirty-seven percent of corn usage. Losing the ethanol market will have lasting implications for U.S. agriculture and companies across the agri-food value chain.
The ethanol industry is in a vulnerable position as it fights a three-front war against low demand driven by COVID-19, OPEC’s current price war and the rise of electric vehicles. The ethanol industry must move quickly to find replacement usage, but a gap this large will be difficult to fill.
The challenges facing the ethanol industry underscore the importance of favorable policies and Congressional support to promote a profitable operating environment for ethanol, the second-largest market for U.S. corn.
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