U.S. ethanol production hit hard by mid-February freezing as it recovers from 2020

Freezing weather that in mid-February extended across the U.S. and impacted petrochemical and refining operations in the Gulf Cost also disrupted ethanol output in the Midwest, according to a late March report from the Energy Information Administration (EIA).

Image courtesy of U.S. National Corn Growers Association

U.S. weekly fuel ethanol production fell to 658,000 barrels per day the week of Feb. 21, the lowest level since May 11 and a 38% on-year decline, according to the EIA's weekly petroleum status report published at the end of March.

Production rates have since then returned to average levels, but fuel ethanol inventories remain lower than their typical seasonal averages at this time of the year heading into the summer driving season, according to an EIA report dated March 31.

Ethanol producers are working to increase output to recover from a poor 2020 when Covid-19 lockdowns slashed fuel demand, according and the Renewable Fuels Association (RFA). In addition, ethanol prices have increased sharply.

Ethanol margins fell

Fuel ethanol margins fell into negative territory in February when a freezing event disrupted natural gas supplies. Natural gas became scarcer due to a surge in demand for heating.

“As a result, many fuel ethanol producers reduced production rates,” according to the report. Some fuel ethanol producers chose to sell natural gas supplies back into spot markets” to take advantage of high prices, according to the report.

U.S. weekly fuel ethanol production has since that time increased to an average of 922,000 barrels per day for the week ended March 19, but fuel ethanol inventories have yet to return to average levels after the supply disruption.

Inventories, prices

U.S. weekly inventories of fuel ethanol fell to 21.3 million barrels on March 12, the fourth consecutive weekly inventory decline. This occurs at a time when inventories typically should be building up.

The March 12 inventory level was 13% less than at the same time last year and the lowest since November 27.

Meantime, Nasdaq’s CBOT ethanol futures traded at $1.88 per gallon on March 30, compared with $0.87 per gallon on April 7, 2020.

Prices have increased from $1.49 on Dec. 28 and have reached their highest level in at least five years.
In the U.S. corn is the raw material to produce ethanol. Corn future prices for the May 2021 delivery contract nearly doubled between early May and early August, according to delayed data available from the CME Group.

Pandemic impact

U.S. ethanol production fell to 13.9 billion gallons last year, down 12%, from the previous year. It was the lowest production level since 2013, according to the Renewable Fuel Association.

In 2020, domestic ethanol consumption was 13% below 2019 and the lowest since 2009. Gasoline consumption in the U.S. fell nearly 14% over the same period.

Demand for ethanol and gasoline is directly correlated as there is a mandated government blend.

The implied ethanol blend rate, the average content of ethanol in gasoline, rose slightly to a record of more than 10%. Ethanol serves as oxygenate for a cleaner combustion and refiners or importers must blend it with gasoline. Most fuel stations sell a mix offered as E-10 that contains 10% ethanol.

“The blend rate slumped to 9% in April (2020) as petroleum prices plummeted and the price of renewable identification numbers (RINs) remained subdued after more than two years in which large-scale exemptions from the Renewable Fuel Standard had been granted to refiners,” the RFA report said.

The Renewable Fuel Standard (RFS) is a mandate by Congress to cut emissions, expand domestic renewable fuels and reduce reliance on imported energy. The RFS orders refiners, and gasoline or diesel importers, to blend biofuels with their conventional fuels unless they apply and get an exemption.

Renewable Identification Numbers (RINs) allow producers and suppliers to show compliance with the RFS.

Pandemic recovery

By December the U.S. ethanol blend rate rose to record highs of nearly 11% as crude oil prices rebounded and post-election ‘RIN’ prices strengthened. There has not been any further refinery exemptions granted during the year.

“While the Covid pandemic, Saudi-Russia oil price war, and trade disputes presented major marketplace obstacles throughout 2020, the U.S. ethanol industry showed its resilience and determination,” said Geoff Cooper, the RFA’s president and CEO

Despite the drop in annual ethanol production and domestic blending, ethanol’s share of the gasoline pool strengthened at the end of the year as RIN prices continued to rebound, he said.

Meanwhile, U.S. ethanol exports were relatively strong, “especially when export barriers and the impact of the pandemic on global fuel consumption are considered,” Cooper said.

Canada has been the main destination of U.S. ethanol exports in recent years.

Brazil sees jump in fuel ethanol prices

U.S. ethanol production uses corn as a raw material, unlike that of Brazil that is made from sugar cane. Brazilian ethanol prices spiked, according to local press.

Fuel ethanol prices rose in Brazil 21% between January and March. The price increase was greater than that for gasoline, which rose 15%, it said.

According to a March 15 report in Brazilian media Veja, Brazilian consumers face seasonally higher ethanol prices during the January-April period that corresponds to an interruption of the sugar cane crop harvest.

The U.S. and Brazil are by far the top ethanol producers in the Americas.

Unlike the U.S., where most vehicles run on gasoline blends with 10% ethanol, Brazilian vehicles are equipped to resist higher ethanol levels and can run on up to 100% ethanol or alternatively solely on gasoline.

Brazilian vehicles allow drivers to switch between ethanol and gasoline depending on price at the pump. Brazil started a program to use ethanol as fuel in the 1970s to reduce dependence on imported energy.

By Renzo Pipoli