CHAMPAIGN, Ill. — Gasoline and ethanol demand is turning the corner after being smacked down by the stay-at-home order.
In early March, U.S. gasoline demand was 9.7 million barrels per day. It slid to 5 million barrels per day after the COVID-19 pandemic hit and folks were asked to shelter-in-place around mid-March.
The recovery began the second week of May when gasoline demand increased to 7.4 million barrels per day, but is still short of the 9.5 million barrels per day normally seen this time of year.
“Gasoline demand is starting to pick up quite quickly as we start to open up the economies around the country and that’s a good thing for ethanol if we can continue this pace,” Todd Hubbs, University of Illinois agricultural economist, said in a recent farmdoc-hosted webinar.
“As you would expect, ethanol production followed gasoline demand down.”
Ethanol production fell from 1.079 million gallons produced the first week of March to a low of 537,000 gallons produced in late April. Production increased to 617,000 gallons per week in mid-May and was expected to increase the following week.
“Even with this, it’s a really sharp reduction in corn demand in general and I think it might be a little bit of a longer process to get ethanol production back up,” Hubbs noted.
Storage
Ethanol stocks also increased dramatically to 27.69 million barrels of supplies in mid-April. Stocks had dropped to 24.19 million barrels by the second week of May.
“We’re going to have to work through some of the stocks to get it down to where we normally are. On the demand side for gasoline, we should see some support for more ethanol production as we move forward,” Hubbs said.
The global pandemic also slowed U.S. ethanol exports.
“Ethanol exports through March were slightly above last year’s pace. But I would expect and I think it’s fair to say that we’re going to see those numbers drop off dramatically in April, May and probably into the summer before we see recovery. A lot of our major export markets, particularly Brazil, Canada and India have been in some form of lockdown and they’re still going though it. I think this is going to be relatively weak,” Hubbs continued.
“Hopefully, we’ll see it pick up some when we get into the summer months, particularly if other economies open back up. When we think about where ethanol is headed, I think we may have seen the worst of it barring some kind of rekindling of the pandemic and I think we’re going to be in a build and strengthen mode.”
Corn Use
The U.S. Department of Agriculture’s current forecast is for 4.95 billion bushels of corn used for ethanol during the 2019-2020 marketing year, but it’s down significantly from earlier in the marketing year.
Hubbs sees the potential of using between 4.8 billion and 4.85 billion bushels of use if there’s a slightly slower recovery.
“I expect exports to be slow to pick up as major export destinations deal with the pandemic. So, we could see some more bushels come out of that projection before it’s all said and done. If gasoline demand does truly pick up I think the USDA forecast may be close,” he said.
The 2020-2021 marketing year forecast by USDA estimates corn for ethanol at 5.2 billion bushels, 4% to 5% below a typical marketing year.
The key issues for the new marketing year include uncertainty regarding the pervasiveness of COVID-19 and its impact on gasoline demand.
“We’ve seen what it does when we start locking down. The other thing is ethanol production potential after this huge shock. Who makes it out alive? There’s been a lot of talk about the ethanol industry going down 15%, 20%, 25%,” Hubbs explained.
“That doesn’t mean we’ll see corn used for ethanol percent drop that much, but there’s a lot of what I would consider excess capacity in ethanol production that can be removed and we can still be hitting these numbers that USDA has put out. It doesn’t mean we won’t hit that 5.2 billion bushels. It means some people are going to be gone and that excess capacity will be removed from the system.
“The big question as always these days is how will policy impact these outcomes.”
Ethanol Policy
Scott Irwin, U of I agricultural economist, noted there were several issues happening from the policy front that could impact the ethanol industry.
The U.S. Court of Appeals for the 10th Circuit on Jan. 24 struck down three small refinery exemptions that were improperly issued by the U.S. Environmental Protection Agency.
“The court decision on its face severely limits the ability of EPA to award SREs if applied nationwide. If that appeals court ruling is allowed to stand and the EPA applies it nationwide it effectively kills the SRE program as it has been administered by the Trump administration EPA,” Irwin said.
“EPA has been asked to revisit 2020 standards in light of the ruling. The decision may be appealed by the U.S. Supreme Court.”
Irwin also noted a set of petitions that have been filed from states and municipalities since the pandemic started asking to waive the 2020 Renewable Fuel Standard based on the “severe economic harm” general waiver provision in the RFS statutes.
“The argument will be can it be shown that the 2020 RFS standards are causing severe economic harm. Previous general waiver requests on similar grounds in 2008 and 2012 were rejected by the EPA,” Irwin noted.
In other ethanol industry news from a policy standpoint, the U.S. House passed the Health and Economic Recovery Omnibus Emergency Solutions Act in mid-May. The $3 trillion coronavirus relief package awaits consideration by the U.S. Senate.
Among the provisions in this second coronavirus relief package, the bill authorizes the USDA to provide 45 cents per gallon of ethanol produced Jan. 1-May 1, 2020, to provide some relief for the U.S. ethanol industry.
“My personal view is that is unlikely to make it through the U.S. Senate and ultimately passed into law but it does provide a first toehold for providing some relief for the U.S. ethanol industry directly from the U.S. government,” Irwin said.