COVID causes ethanol losses: Sharpest downturn in industry history

WASHINGTON — The ethanol industry has taken a $3.8 billion hit from the COVID-19 pandemic, according to an analysis by the Renewable Fuels Association.

“Economically, the transportation fuel sector has really been hit by a combination of the lockdowns that occurred in the spring and people’s reluctance to go about their lives in the same way as they did pre-pandemic,” said Scott Richman, RFA chief economist and analysis author.

The ethanol industry lost 2 billion gallons of production from March through November of 2020. That equates to about 700 million bushels of corn.

“That was the sharpest downturn that we’ve experienced in industry history,” Richman continued. “Conditions improved somewhat in the summer. They never got back to normal. Really since about mid-October, with the worsening of the pandemic, we’ve seen another return to somewhat steeper losses.

“It’s a resilient industry, but taking a look back and what’s happened this year, it’s been a really tough year for the industry. The economic impact has been quite large.”

The low point occurred in April, when ethanol production and consumption fell by nearly 50% over previous years.

“We’ve had a bit of a double-whammy.”

—  Scott Richman, Renewable Fuels Association chief economist

Richman gave further details of his analysis and his outlook heading into 2021 during the RFA podcast.

Was there any rebound in the ethanol industry in the summer?

“We snapped back fairly quickly, but over the summer we were about 10% below year ago levels, and that continued through the fall roughly from July 4 to mid-October. Unfortunately, that’s worsened over the last six-plus weeks. As a result of that, and as a result of the deterioration of margins that’s occurred, we’re starting to see facilities scaling back 10%, 20%. We are starting to see pull-back as a result of the deterioration that’s happened.

“We’ve seen some estimates that Thanksgiving gasoline consumption was maybe 25% off from year ago levels, according to private analysts. That’s not as bad as it could be because there were probably some people who decided to drive rather than fly.

“At least anecdotally, we have had some additional demand in road transportation from the fact people don’t want to fly, people don’t want to take mass transportation. What happens in January and February is a little bit concerning.”

In a typical supply/demand scenario, lower supply means higher prices, but that wasn’t the case with ethanol in late 2020.

“We’ve had a pretty considerable increase in corn price, which is our main raw material, as a result of increasing exports mainly to China and as a result of some dry weather overseas. We have seen gasoline and crude oil prices pick up as a result of the optimism over the vaccines that have now been approved and they’re being rolled out.

“Unfortunately, with the ethanol supply and demand situation the way it is, ethanol prices have been coming down. The one silver lining to that is ethanol prices are roughly a parity with gasoline prices which helps competitiveness. We’re starting to get price pressure and margin pressure.”

Ethanol production byproducts include distillers dried grains, carbon dioxide and now hand sanitizers. How has the pandemic impacted the byproducts markets?

“The co-product side of things on distillers grains, the impact has been somewhat less as otherwise it would have been because prices have responded. We’ve had rather strong prices that have helped offset some of the volume loss. We’ve had good domestic and international demand for distillers.

“On the industrial alcohol side, that’s been another silver lining. Ethanol plants have been able to contribute to their community by helping to producer sanitizer or provide the alcohol for producing hand sanitizer. But really the industrial market is in the hundreds of millions of gallons and before this in the fuel market we were producing roughly 16 billion gallons of fuel, so it’s helpful, but the fuel market is very large and you can’t fully offset that.”

About 45 ethanol plants in the U.S. supply carbon dioxide byproduct to an adjacent CO2 plant, usually owned by carbon dioxide manufacturers. Dry ice, a solid form of carbon dioxide, is used for storing some COVID-19 vaccines.

“The ethanol industry is a key contributor of a pure stream of carbon dioxide that gets used in different industrial applications. Typically, ethanol plants will have an off-take agreement with a gas company and provide carbon dioxide to that company. The ethanol industry is a very important source of CO2 in the United States, and I’m sure that some of it is going toward dry ice that’s being used for some of the vaccines.

“Right now it is notable that some of the facilities that do capture CO2 have been idle at times during the year and back in the spring that was a big concern. It’s still a bit of a concern, but things seem to be handled right now so hopefully dry ice will be a high priority and we’ll get through this without any big hiccups.”

How have ethanol exports been impacted this past year?

“We’ve had a bit of a double-whammy. Our export market has definitely been impacted by COVID. Brazil has been sometimes the top market, but often in the top second or third market over the last five years and that market was somewhat effected by COVID in the transportation fuel consumption just like we were. You add on top of that the uncertainty over the expiration of the tariff rate quota and it’s really not been a good market in recent months.

“There are other markets that have been impacted in varying degrees by coronavirus and there are a few — such as India and Mexico — where we’ve seen increased exports of industrial alcohol to those markets. We’ve been hopeful for China because of the Phase One agreement early last year. They seem to be doing a little bit of nibbling right now, but it really hasn’t turned out to be the level of volumes we would have hoped coming into the year.

“The export market is going to be down probably the same percentage as the domestic level this year largely because of COVID.”

Looking toward 2021, what words of optimism can you offer to ethanol producers?

“Going forward, once the vaccines are widely distributed enough I think people are going to want to return to some sort of normalcy in life. I think people want to take vacations, want to drive to drive to places like Florida. I think people will still be a little skittish about mass transportation.

“Some of those markets overseas that have been affected by the transportation fuel consumption are going to be better going forward. We’re hoping that the incoming administration will have some policies that are friendly toward low carbon fuels. There are some reasons for optimism. It’s just one of those things where we have to get through the next few months.”