On Friday, March, 1, the USDA released their monthly Grain Crushings report. A major feature of the report is that it highlights the volume of corn and sorghum processed monthly for fuel while providing insight to the co-products production of: DDGs, corn oil, corn gluten meal and germ meal. Of particular interest, the data in the report is helpful for making assumptions about the USDA’s corn for ethanol use in the monthly WASDE report.
While the Grain Crushings report runs one month in arrears, the data in the March report represents the first five months of the 2018/19 marketing year. In the February WASDE, the USDA estimates corn for ethanol use at 5.75 BBU. This figure was 25 MBU lower than the USDA had estimated in the December report, and the January WASDE report was canceled. Given the current stocks levels and the current margin structure of the domestic ethanol refiners, at the five-month mark of the marketing year, it seems probable that the corn for ethanol demand category could experience further reductions into the balance of the marketing year.
Historical USDA Treatment of Ethanol Demand in the WASDE
Examining how the USDA treats the ethanol usage category in the WASDE between February and the final report in November helps provide some clarity about further adjustments. Starting in the 2008/09 marketing year, the USDA has made two downward, or negative, adjustments to the ethanol category while raising the demand eight times.
Of these two reductions, the volumes were 41 MB in the 14/15 marketing year and 19 MB during the 15/16 marketing year. These negative adjustments on both an absolute and percentage basis were intangible and represented less than 1% of the total bushels demanded for ethanol production in the two marketing years. Therefore, while the margin structure is unimpressive and the domestic stocks are robust, it seems like a low probability that the USDA will make a material negative adjustment to the category.
Current Demand Structure
Using the data from the March Grain Crushings and Co-Products Production report, the current YTD grind rate for the 18/19 marketing year is 2.27 BBU of corn and approximately 42.7 MBU equivalent of ethanol. Using the corn number through January or five months into the marketing year, the current monthly grind rate is approximately 41% of the USDA’s estimated 5.575 BBU—not far off the pace required to meet the WASDE estimate. Seasonally, ethanol production softens during the winter into mid-spring and then increases headed into the summer, peak driving months and peak demand time.
The current stocks build during the 18/19 marketing year has been interesting and can be partially explained by:
- Sluggish demand that was lost to price competitiveness of reformulated gasoline.
- Strong export business led by Brazil, Canada and India, along with the anticipation of future Chinese demand pull.
- A complex industry margin play that is the result of recent consolidation. While the third scenario is interesting, the technical nuances fall beyond the scope of this publication, and the first two scenarios represent tangible demand variables.
While operating one month in arrears, the USDA Crushings Report indicates that the corn demand for ethanol is at an adequate, if slightly behind, pace required to meet the WASDE estimate of 5.575 BBU for the 18/19 marketing year. While the export demand has been robust, ethanol’s increased competitiveness with RBOB, reformulated gasoline, is a positive input.
Lowering the corn usage for ethanol by 25 MB in the February WASDE was prudent; monitoring the production levels, weekly stocks along with the export and competitiveness with RBOB over the next few months will help determine if the USDA will make further adjustments. Given the USDA’s historical treatment of the ethanol category, the probability is that the government will raise not lower demand. If the demand is lowered it would be prudent to expect small adjustments in 25 MBU increments.
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