For the US ethanol market, 2020 looks to be a challenging year, filled with uncertainty both from outside the industry and within.
International trade policy, government regulations and weather are expected to make big impacts on the market, but ethanol producers themselves will have a large influence on how prices react in the upcoming year.
"Unfortunately, I think this could be a few tough months," a source told S&P Platts.
AT THE MARGINS
Ethanol prices bounced between soaring highs and woeful lows in 2019, mostly the result of vacillating crush margins. A steep drop in corn prices in June inflated crush margins and pushed producers to churn out vast amounts of ethanol. Then margins cratered because of oversupply, and producers had to idle or shut down ethanol plants.
Ethanol executives late in the year pointed to the need for companies to be more cautious when ramping up production.
"We are cautiously optimistic that we will see an industry that will continue to keep supply and demand in better balance," Neil Koehler, CEO of Pacific Ethanol, said during the company's most recent earnings call. "But you're right, there's always that risk that with the positive margins, which we have not seen in quite some time, that we overdo it as an industry and we ramp up production, and we get back out of balance."
There's not much evidence, however, that the industry is learning any lessons from 2019. Since reaching a 2019 low of 943,000 b/d for the week of September 24, domestic ethanol production rose in 12 of the next 13 weeks. Consequently, crush margins, which had recovered from the summer plunge to rise above zero in September, fell back into negative territory in the last week of 2019.
MOTHER NATURE
Production won't be the only factor to affect crush margins. Weather will have a large impact as well. The past year brought volatile conditions that wreaked havoc on feedstock corn prices. Floods and brutal cold caused uncertainty with the US corn crop, and that uncertainty translated into higher corn futures.
But when USDA data showed the crop wouldn't be as harshly affected as the market expected, futures plunged and margins swelled. The end result was the aforementioned surge in ethanol production. The cold weather also disrupted rail lines and shipping lanes, pushing up prices in coastal markets isolated from the Midwest.
Experts expect that those dramatic weather patterns could become the new normal.
Weather could play a part not just in the US, but in other regions as well. Traders will keep a close watch on the progress of the South American corn-growing areas to see if weather affects that continent's crop as well.
"Everyone's keeping an eye on South American corn," the source said. "If the South American crop starts to look good, and we don't have China (as an export market), then corn prices could get low. Then we may start producing more ethanol."
GO WEST TO THE FAR EAST
US ethanol producers have been cut off from the world's second-largest economy since China imposed steep tariffs on US ethanol imports in recent years. Ethanol leaders feel the industry has maxed out its growth domestically, so US ethanol needs foreign markets to expand.
In December, the icy trade relationship between the US and China saw a bit of a thaw, as the two countries reached a "Phase One" trade deal that would include billions of dollars in purchases of US agricultural goods.
That could signal good things for the future of the US ethanol market, which exported 204 million liters of ethanol in 2018 but has only exported 212,000 through the first 10 months of 2019.
But any trade pact between China and the US can fall apart, as negotiations showed in 2019. In the meantime, the ethanol market has other regulations to deal with when it comes to Washington.
The Trump administration has tried to placate the domestic biofuels industry and assure it that it has its support. But many felt betrayed by the US Environmental Protection Agency's recent decision on how to deal with small refinery exemptions, which critics say undercuts federal biofuels blending requirements.
The EPA issued a waiver to allow for year-round sales of 15% ethanol gas blends as a carrot to biofuels supporters, but it will take a long time for demand to develop for higher blends. Meanwhile, domestic ethanol producers felt that Trump was siding with refining interests over them.
