FORT COLLINS, Colo. (Reuters) - Even before the coronavirus outbreak, most analysts believed U.S. corn supplies would swell to 30-year highs in 2021.
But those prior stock expectations are now much too low considering the sharp loss in corn demand by way of ethanol, and inventory stands to bulge even further if ethanol output does not recover in a timely fashion.
In the week ended May 15, U.S. fuel ethanol production averaged 663,000 barrels per day, the eighth consecutive week of significantly reduced output due to the virus-fueled drop in oil demand. That is according to figures published on Wednesday by the U.S. Energy Information Administration (EIA).
Output was up 7% on the previous week, which was the most productive one since that ended April 3.
U.S. ethanol stocks fell for the fourth week in a row through May 15, dropping 2% on the prior week to 23.6 million barrels. That is off 15% from the all-time high four weeks earlier.
But implied ethanol usage in the latest week was off 9% from the previous week at about 744,000 bpd. That is still the second-best demand week since the coronavirus crisis began.
That is supported by corresponding U.S. gasoline demand, which was down 8% on the week through May 15, its first decline in six weeks. That figure of 6.8 million bpd is up 34% from the low set six weeks earlier.
The U.S. Department of Agriculture last week placed corn use for ethanol production in the 2019-20 marketing year ended Aug. 31 at 4.95 billion bushels, down 475 million from its March estimate. The March projection could be considered “pre-virus.”
Through May 15, it can be estimated that the latest eight weeks of reduced ethanol output has caused a loss in corn demand of about 350 million bushels, which leaves about 125 million bushels of cushion left per USDA’s latest peg.
That cushion would imply that between May 16 and Aug. 31, ethanol production cannot average more than 8% below the rates that would have been expected without interruptions. Anything more than that suggests that more corn demand has been lost than USDA last predicted.
A week ago, a departure of 10% would have been acceptable, implying that time is quickly running out.
Corn use for ethanol production accounts for nearly 40% of annual domestic corn demand, so the losses are highly impactful, and any further reductions to use in 2019-20 will simply increase the starting stocks for 2020-21. USDA already sees 2020-21 carryout up 58% on the year.
However, the agency has already built in some losses for next year’s corn use for ethanol, so there is some additional cushion there. USDA pegs that number at 5.2 billion bushels in 2020-21, down 250 million from its February outlook.
While USDA’s latest assumption for 2019-20 corn use for ethanol is still within the bounds of reality, some simple math demonstrates the delicacy of this balance even under optimistic forward scenarios.
There were just over 15 weeks left in the 2019-20 corn marketing year as of Friday, and ethanol production in the latest week was about 37% below the pre-virus levels, or what for this example, will be considered “normal” or “expected” levels.
If that departure from normal were to improve by 3 percentage points each week from now through August, “normal” output levels would return by mid-August. And under that scenario, production in the final 15 weeks would average about 11% below expected levels, requiring USDA to remove another 50 million bushels from corn use for ethanol.
But now suppose that weekly production recovers versus normal by only 2 percentage points per week from now through August. That would mean output increases to about 6% below normal levels in the last week of August. Output in the final 15 weeks of 2019-20 would average about 20% below expected levels, causing the loss of an additional 200 million bushels.
The opinions expressed here are those of the author, a market analyst for Reuters.
Editing by Marguerita Choy
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