Cuts to ethanol production weigh heavily on corn market

Whether it is the drop in oil prices due to a major spat between Russia and Saudi Arabia or the COVID-19 outbreak, the ethanol industry is dealing with massive challenges in the short term. Ethanol plants in Canada and the U.S. are reportedly scaling back production as a result, which is creating concern for corn and general purpose wheat demand.

As people in North America have begun to practice social distancing over the past two weeks and staying home, demand for fuel has fallen resulting in big drops in fuel prices not seen in years. To put the demand drop in perspective, Patrick De Haan, chief analyst at GasBuddy tweeted, “demand data is terrifying…. showing demand destruction of 50-70% now with most states down 65-75%.”

GasBuddy does not have Canadian demand data, but if prices are any indication, the same thing is happening north of the 49th parallel.

Chip Flory, host of Agritalk, was a guest on RealAg Radio this week, where he wondered if the social distancing practices could stick over the longer term. “Look at the trickle down impact on ethanol, in some of these situations you have to wonder if some of these tendencies stick where commuting is down in the future.”

For some analysts, they believe that the upside potential for U.S. corn is all about Chinese demand, but Flory takes a more cautious approach. “This is just weird, a month ago we were saying that the export market stunk and we were relying on domestic demand holding up overall demand of corn and now we are seeing the opposite.” Flory continued, “Can China and other importers buy enough corn to make up the difference? I just don’t see it.”

The March 26, 2020, USDA weekly corn export report showed net sales of 1,814,300 MT for 2019/2020, which was up from the previous week and up 81 percent from the prior four-week average. The increase was primarily due to China at 756,000 MT.

Ted Seifried,of Zaner Ag Hedge says he is concerned there’s a “black cloud” hanging over the corn market because of reduced ethanol production. He describes ethanol as one of the biggest “casualties” over the last two weeks because of COVID-19, but that’s not the only reason.

For Canadian farmers, there are a few reasons why this should be on your radar:

  • Corn is the lead commodity in the ag commodity complex and any sustainable strength in the overall market must be led by corn. Even if you do not grow corn , its price direction impacts the crops you grow in Western Canada.
  • Some growers in Western Canada have told RealAgriculture they will not be growing any wheat destined for Canadian ethanol plants based on lack of bids.
  • Feedyards and feed mills are being told that DDG supplies are tightening and some contracts cannot be filled.

Unfortunately, at $23 oil, not only is the Canadian energy sector under threat, but so are ethanol plants — which impacts commodity prices, too.

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