Ethanol prices: ‘Slim to negative margins in the offing’

Amid increased production, trade disputes and sagging demand, Denver-based CoBank flags challenges facing corn ethanol producers over the next two years.

The global ethanol markets will likely see a price correction within the next two years, according to CoBank.

Ethanol producers’ recent reinvestment in the face of “mediocre” demand growth has created the conditions for a fall in prices, the US lender argues in a report.

“With production and stocks expected to outpace demand growth both domestically and in the export market, a period of slim to negative margins is in the offing,” CoBank manager Tanner Ehmke wrote. “This correction is not expected to be like prior corrections, such as 2012-13, when ethanol producers felt the pain of $7/bushel corn and production was significantly curtailed.”

Updates to existing plants and construction of new facilities is expected to add 850 million to 900 million gallons to global ethanol production by 2020, according to the report. Part of that increase was demonstrated last month, when Iowa-headquartered Summit Agricultural Group inaugurated a $115 million ethanol plant in Brazil, the nation’s first to use corn as a feedstock.

The firm’s founder and chief executive Bruce Rastetter told Agri Investor that the FS Bioenergia facility will have an initial production capacity of 60 million gallons and that Summit hopes to build up to 250 million gallons of production across multiple sites within two years.

On the demand side, while recent years have seen support from an increased adoption of 15 percent ethanol blends into gasoline among US consumers and broader fuel demand growth stemming from low oil prices, key uncertainties lie ahead, according to the report.

The US Environmental Protection Agency is “increasingly likely” not to approve a proposed waiver of Reid Vapor Pressure emissions-focused regulations that limit the sale of 15 percent ethanol blends during summer months, the report says. Over the long term, Ehmke writes, increased fuel efficiency, adoption of electronic vehicles and the rise of ride-sharing services all suggest international markets will play a bigger role.

There, too, Ehmke presents challenging prospects for ethanol producers, with changes in key export markets for both ethanol itself and byproducts sold into animal feed markets creating uncertainties.

Brazil, the largest export market for US ethanol producers in recent years, is likely to fade in importance as changing conditions in global sugar markets inspire domestic refiners to shift back to ethanol production, according to the report. China, previously a key destination for the dried distillers grains that are a byproduct of corn ethanol production, instituted WTO anti-dumping measures on the US in January, removing a key revenue stream ethanol producers.

“US ethanol producers will look to increase exports to markets like India, Mexico, Thailand and Indonesia, where governments are seeking to improve air quality. Mexico in particular is expected to be a growth market in the near term,” Ehmke wrote.