Ethanol industry sees prices fall to record low as demand for motor fuel drops
The ethanol industry, like many sectors in the U.S., is enduring unprecedented economic hardship as a consequence of the coronavirus pandemic. But the industry was facing demand destruction and challenging economics before COVID-19 hit and motor fuel demand started plummeting.
Most analysts today are expecting about a 20 - 25% drop in consumption in the near term, President and CEO of the Renewable Fuels Association (RFA), Jeff Cooper said in a March 19 conference call. Ethanol prices have fallen to record lows. So it's not surprising that ethanol producer margins have also fallen and are in deep negative territory.
"These are some of the worst margins that we've seen in the industry's history," said Cooper. "The coronavirus challenge comes on top of other difficulties that we were already experiencing in the ethanol marketplace."
Cooper sited the oil price war between OPEC and Russia, ongoing trade disputes with China and other export markets and small refinery exemptions under the Renewable Fuel Standard as factors that have "conspired to create not just a perfect storm for ethanol, but a perfect tsunami."
Many ethanol plants have significantly reduced their output, while others are idling. Substantial reductions in ethanol production are expected in the weeks ahead, as producers contend with lower fuel demand, record low prices and negative margins.
"To help our industry survive these disastrous market conditions, we are calling on Congress and the administration to take action immediately to avert a potential collapse in the ethanol industry," Cooper said. "Beyond that, we are asking the administration to immediately announce It will not appeal the recent 10th Circuit Court decision on small refinery exemptions under the Renewable Fuel Standard. We're also calling on the administration to announce that it will apply the decision nationwide."
Four other ethanol industry experts joined Cooper on the conference call: Jeanne McCaherty, CEO, Guardian Energy Management; Vice Chairman, RFA; RFA; Randy Doyal, CEO, Al-Corn Clean Fuel; Board Member, RFA; Chad Friese, General Manager Chippewa Valley Ethanol Company; and Scott Richman, Chief Economist, RFA.
McCaherty, said her company represents over 10,000 green producers from six plants in three states which produce about 370 million gallons per year. Their first concern is for their employees and making sure the companies are following Center of Disease Control and Prevention (CDC) to protect employees and any "stakeholders that touch our business."
The second concern is job security for employees.
"Each of our sites has around 50 employees that could be affected by these changes that are coming down the road, but the impact is so much bigger," McCaherty said. "We're in rural communities where there are literally hundreds of indirect people who touch our plants every day."
Everything from corn producers to contractors to restaurant staff, all impact the rural economy.
Demand destruction, the downward shift toward lower demand, has been estimated between a 15% - 60% reduction across the industry. "Nobody knows what that's going to look like, McCaherty said.
"Clearly with that kind of demand destruction piled on top of the other demand challenges we've had over the last years, it will be devastating to us as an industry," said McCaherty.
In facing the challenges, physical logistics of space to store ethanol on site and customers having a defined amount of storage is one thing they are watching every day to make sure the logistics are fluid and they can continue to ship, McCaherty explained.
Doyal's plant in Minnesota produces about 120 million gallons of ethanol per year. Doyal has been in the ethanol industry since the early 1980s and has seen a lot, most of it centered on local impacts. But the coronavirus pandemic is "extremely generalized" and impacting the entire industry.
"We haven't seen anything like this since the financial collapse," Doyal said. "That impact on our industry was frankly, fairly short. This one, I'm afraid, we will all feel for much longer than we want. And it's not going to be good."
Doyal said there have been some rumors of plants slowing down or shutting down as ethanol is not able to be moved, which would directly impact employees. The impact of plants shutting down would be tragic to local rural communities. Doyal's company, Al-Corn Clean Fuel, was started in 1996 when a group of farmers wanted do do something more to improve the economics of their rural community. The company expanded many times over the years to grow a market for their corn, which has increased the health of the economy for everyone.
"We're doing everything we can to make sure that we can survive and weather the storm, but it's going to be ugly," said Doyal. "Every employer's got to be thinking about the impact of their employees. And we're definitely in the same place."
Friese's company is a cooperative in structure with about 950 local investors that own the facility and employs 52 people at the facility in Benson, Minnesota. He said they've tried to create some diversity over the years through beverage and pharmaceutical grade alcohols, which makes his plant fairly unique. In light of the coronavirus and drop in fuel prices, they decided to "slow down on the fuel side and put more effort towards the industrial to try and optimize and increase production there as much as we can."
"Our decision from a fuel perspective was, well, we couldn't do anything there," Friese said. "We've tried to shift our focus and supply as much on the hand sanitizer markets as we can, but that industry has completely different specifications than what the the fuel markets are."
Most ethanol fuel facilities are not designed for pharmaceutical grade since it comes in contact with humans. "It's a big shift," said Friese.
Fuel market logistics of rail cars and trucks being available to provide alcohol for hand sanitizers are a concern in the midst of COVID-19.
"We need those logistical challenges and logistical channels to stay open," Friese said.
House Agriculture Committee Chairman Collin Peterson said two announcements from the Federal government on March 19 would expand flexibility in response to the growing coronavirus pandemic.
Public guidance from the Alcohol and Tobacco Tax and Trade Bureau gives added flexibility for alcohol fuel plants and beverage distilled spirits plants to shift to the production of ethanol-based hand sanitizers, according to a press release.
Also, an expanded emergency declaration from the Federal Motor Carrier Safety Administration provides regulatory relief for motor carriers transporting essential supplies, food and fuel.
“These two actions will provide flexibility for folks along the food and fuel chain to respond to immediate needs within their community and beyond as the challenge of fighting the pandemic grows,” said Peterson in the press release.
“Expanding the operations making hand sanitizer grows the need for ethanol at a time when farmers need that,” he added. “And enabling carriers to move freely in providing food, fuel and supplies enables farmers and wholesalers to move food products including milk, as well as livestock and poultry more easily to where they need to be.”
However, further concern lies in not only keeping ethanol plant workers safe from the coronavirus but what happens if they lose key employees in plants where jobs are highly specialized?
"Our ability to operate could be compromised and, for the safety of all of the employees at that point in time, you may not have a choice but to shut the facility down," said Friese. "We were hoping that we can continue to produce this much needed product right now in the market."
From an economics perspective Richman looked at monthly gasoline consumption data from the first Gulf War around 1999, the 9/11 terrorist attack and the Great Recession. In that data he saw two draw downs between 13% and 20% where there was fairly rapid rebounds, however, recovery from the Great Recession took a bit longer, he explained.
"However, they're not really perfect analogues to what we're going through right now," Richman said. "We're going through something that most of us have not experienced during our lifetimes."
Richman said it will be "difficult to put a specific number on how much transportation fuel consumption is going to decline and therefore how much ethanol consumption is going to decline in the coming weeks and months," until they know how long imposed constraints will last, how many people lose their jobs and how quickly the economy recovers.
"The bottom line is this — we are a resilient industry," said Cooper. "We've pulled through extreme challenges and catastrophes before and we will get through this one as well. Our nation and our world depend on the products that our industry makes every day. And that's not going to change. We may have some dark days ahead of us, but the future remains bright for ethanol and I have no doubt that our industry will emerge from this stronger and more unified than ever before."