FORT COLLINS, Colo. (Reuters) – U.S. ethanol output has remained generally weak in January amid shabby profitability, though a shot of optimism arrived this week on a report that China, which somewhat shunned the American biofuel four years ago, has already secured a record annual haul for 2021.
China has never been a leading player on the U.S. ethanol export front and the corn-based biofuel historically accounts for a small portion of American farm product trade. But possibilities could be strong given China’s generally thin supplies of agricultural commodities and its record purchases of items like corn and soybeans.
The chief financial officer of Archer Daniels Midland Co said on Tuesday that China had already secured about 200 million gallons of U.S. ethanol for the first half of 2021. That would tie the previous annual record for U.S. exports of the biofuel to China set in 2016.
That comes at a time when poor profit margins have slowed U.S. production. Output generally trends downward at this time of year, but production is slightly slipping versus prior years, now around 10% below average according to data published by the U.S. Energy Information Administration on Wednesday. That was closer to 9% a month ago and 8% two months ago.
But there may be small signs of hope on the domestic demand front in addition to the encouraging news on China.
U.S. ethanol use has drifted slightly upward over the past month, against the seasonal pattern of a sharp decline throughout most of January. By Jan. 22, the four-week average implied usage was down about 5% from the average, a four-month best.
U.S. coronavirus cases have fallen notably since reaching a peak earlier this month and more than a million vaccines are being administered daily across the country. Top gasoline consuming state California on Monday eased strict stay-at-home orders after nearly two months.
Nationwide motor gasoline demand has yet to register significant strides. Those recent weekly numbers are around 11% below the three-year average, better than the near 13% deficit in December but not as good as the 9% mean in November.
CHINA AND OTHER TRADE
The United States exported a record 198 million gallons (750 million liters) of ethanol to China in 2016, accounting for an anomalously high 17% of total shipments. It had been 8% in the prior year.
But U.S. ethanol exports to China dropped off in 2017 when fuel ethanol import tariffs rose to 30% from 5%. Later that year, China announced its plan to implement a nationwide E10 mandate by the end of 2020, which would require a significant expansion of production capacity.
That goal was suspended a year ago amid a sharp decline in corn stocks and limited output capacity, though fuel ethanol production still rose to a record 4.3 billion liters in 2019, up 43% from 2017.
According to USDA’s Beijing attache, China’s fuel ethanol consumption hit 4.3 billion liters in 2019 before falling more than 20% last year due to the pandemic. For comparison, the United States consumed nearly 13 times that amount in 2019.
China did not import any fuel ethanol in 2019, though when imports peaked in 2016, they accounted for about a quarter of annual fuel ethanol consumption. That remains the highest yearly share on record, and virtually all those 2016 imports were from the United States.
China’s official tariffs on U.S. ethanol remain high, though early last year they were reduced from an effective 70% rate to 45% for importers that applied for tariff exclusions. It is not certain when the recent deals occurred, but the hefty duties combined with elevated U.S. ethanol prices make the biofuel awfully expensive for Chinese buyers.
Although more than a third of annual U.S. corn use is devoted to ethanol production, exports of the biofuel have accounted for no more than 10% of the annual output. Further, U.S. ethanol exports by value have never accounted for more than 2% of all annual exports of agricultural and related goods.
In the first half of the 2019-20 corn marketing year, U.S. ethanol exports were on record pace. But the pandemic crushed exports in the second half ended Aug. 31, and total shipments fell to a four-year low of 5.1 billion liters (1.3 billion gallons). Exports returned to average levels in the last months of 2020.
Canada is the top destination for U.S. ethanol, accounting for nearly a quarter of exports. Brazil had taken over the top spot late last decade, but the future of trade with the South American country is uncertain as its tariff-free import quota period expired last month.
The opinions expressed here are those of the author, a market analyst for Reuters.
Editing by Matthew Lewis