Margins to produce ethanol in the Corn Belt - where most U.S. production takes place - have fallen to a four-year seasonal low, while ethanol inventories are at the highest seasonally since at least 2010. Production hit its highest seasonal level since 2010, the earliest data available.
Industry sources said this glut makes future cuts inevitable, particularly as corn prices are making production even more expensive. That could boost fuel prices, as U.S. law requires ethanol to be blended into gasoline.
“Plants have exhausted all resources and I think we will start seeing some real cuts to production,” said Josh Bailey, chief executive of Eco-Energy, a marketer and distributor of ethanol. He said most producers are losing money on every gallon produced given the weak margins. This downturn has been deeper than before, lasting more than a year instead of just a few months.
Corn futures on the Chicago Board of Trade traded at about $4.49 a bushel last week, the highest for this time of year since 2013. Corn is the primary feedstock for ethanol production, and wet Midwest conditions this year disrupted planting for farmers, creating uncertainty around corn supply and increasing price volatility.
Shares of ethanol producers Green Plains Inc and Pacific Ethanol Inc have slumped by more than 40% since April, Refinitiv Eikon data showed. Green Plains’ shares are at multi-year lows and Pacific is trading at all-time lows ahead of the companies’ quarterly earnings reports in coming weeks.
Producers have fought deteriorating market conditions over the last year. Pacific idled part of its Aurora, Nebraska, plant late last year with no near-term plans to restart it. Green Plains agreed in October to sell three of its ethanol plants to Valero Renewable Fuels Co, and in June suspended its quarterly dividend.
This year, Archer Daniels Midland Co said it may spin off three large dry mills, which primarily produce only ethanol.
Bailey said U.S. President Donald Trump’s trade wars have dented ethanol exports, specifically with China, hurting domestic producers who have nowhere to dump excess production.
Midwest ethanol production totaled 991,000 barrels per day (bpd) last week, highest seasonally since 2010, the earliest data available, according to the U.S. Energy Information Administration. Overall U.S. production was at nearly 1.07 million bpd, the steepest for mid-July also since at least 2010, EIA data showed.
Ethanol inventories rose to 23.4 million barrels, highest seasonally since 2010.
“At some point it becomes a strong enough signal when [cuts] are going to have to come from multiple places and I think that’s about where we are right now,” the industry source said.
Trump earlier this year lifted the ban on summer sales of higher ethanol blends of gasoline, called E15, hoping to give a boost to Midwest farmers struggling under his trade wars. However, infrastructure such as gas station pumps and tankage to deliver E15 across the nation is not in place, blunting the positive impact.
