Trends in U.S. Energy Inventories: Has Increased Ethanol Production Resulted in Increased Stocks?
AgMRC Renewable Fuels Monthly Report
Dr. Robert Wisner, University Professor Emeritus, Iowa State University
and Biofuels Economist, Ag Marketing Resource Center
Important features of the current U.S. motor fuel market include (1) slightly increasing U.S. gasoline use (i), (2) record fall of the current marketing year ethanol production (versus fall quarter of past years), (3) a recent sharp decline in gasoline prices, (4) sharply increased U.S. crude oil production in the last few years, (5) low U.S. crude oil prices, and (6) relatively low feedstock costs for biofuel production. In this setting, the renewable fuels industry faces several important questions that affect its economic situation and future, along with those of crop farmers and related industries. Inventories can be considered as a barometer of how well production is being absorbed by the market. Low gasoline prices limit the price that blenders can afford to pay for ethanol. That, in turn, affects profitability of ethanol producers and the price they can pay farmers for corn. Corn prices influence feed costs for the livestock and poultry industries, profitability of grain farming, and could influence the number of acres planted to corn next year.
In this article, we review inventories of gasoline, ethanol, U.S. crude oil and biodiesel for the last several years and evaluate them relative to total market utilization. A key question to be examined is whether ethanol inventories are reaching excessive or potentially troublesome levels. As will be seen from the analysis, so far that has not happened, but inventories need to be watched closely in the months ahead.
Long-term and Recent Weekly Ethanol Production
Figure 1 shows the long-term trend in ethanol production from corn starch and U.S. biodiesel production through 2014-15. (ii) The growth rate in biofuel production has slowed greatly from the rapid pace of the mid-to-late 2010s. However, ethanol production has continued to increase slightly in the past two and one half years. Biodiesel production, shown in billions of gallons in the red line at the bottom of the chart has fluctuated in a narrow range in the past three years and is much smaller than ethanol production. The growth rate for both of these biofuels will be influenced some by recently released EPA mandated blending volumes for 2014, 2015, and 2016. EPA on November 30 issued its final mandates for ethanol, biodiesel and other biofuels for these years. By law, the 2014 mandates should have been issued in November two years ago and the 2015 mandates should have been issued last November. The final proposals were modestly above earlier proposed levels. However, the corn starch ethanol and cellulosic biofuel mandates remain below those called for in the 2007 energy legislation. (iii)
Figure 2 shows weekly ethanol production data for the last five marketing years and production through December 11 of the current 2015-16 marketing year. Production was at higher levels than in previous years for 14 of the first 15 weeks of the current marketing year. However, it is uncertain whether record production can be achieved in the months ahead, when last season’s production exceeded each of the previous four years and for much of the December-August period was near recent production levels. Figure 3 shows weekly inventories of ethanol and gasoline since early June 2010. Linear regression trend lines are shown for both categories of fuel. For ethanol inventories, the trend has been flat despite increased production. In contrast, the gasoline inventory trend has been slightly upward.
Despite increased ethanol production over this period, the inventories through early December indicate the domestic and foreign motor fuel markets have been able to absorb production without excessive build-up of stocks.
Ethanol Inventories as a Percentage of Gasoline Stocks – a Caution
Figure 4 gives a slightly different inventory perspective, with ethanol inventories as percentages of gasoline inventories. These percentages ranged from a low of 6.9% from June 2013 to March 2014 to a brief high of 10.7% in late May of 2012. After trending downward since mid-June of this year, ethanol inventories have been increasing as a percentage of gasoline since late October and were 9.26% on December 11, 2015.
This very recent upward trend in ethanol stocks as a percentage of gasoline should be watched closely by the ethanol industry. In mid-November, gasoline prices dropped sharply, causing near-by ethanol futures prices to be 11% or 14 cents per gallon higher than near-by RBOB gasoline futures. Ethanol producer margins have been quite narrow this fall so that with recent corn prices, there is not much potential for ethanol prices to decline to be more competitive with gasoline. Ethanol has about 2/3 the energy content of gasoline per gallon. Petroleum refiners and blenders have developed processes that reduce gasoline costs by refining lower-octane gasoline and using ethanol to increase the octane content to acceptable levels. For that reason, ethanol prices for short periods have been able to exceed gasoline prices, despite ethanol’s much lower energy content.
The recent sharp rise in U.S. crude oil production has come from shale oil, which produces lower octane gasoline than other types of crude oil. (iv) Since ethanol has been an economical means of boosting gasoline octane to acceptable levels, increased use of shale oil likely has increased ethanol’s ability to be priced slightly above gasoline. However, it is not clear what amount of ethanol price premium over gasoline might start to encourage use of alternative additives for enhancing octane content.
The table below gives an indication of margins for ethanol producers in Iowa in mid-December and upward potential in corn prices before ethanol plants would begin to curtail production. The upper area of the table shows Iowa corn and ethanol prices at plants, dried distillers grain (DDGS) prices per ton, and values of ethanol and DDGS per bushel of corn. We show combined value of the co-products and gross margin per bushel over variable costs with the 17.75 pounds per bushel DDGS yield shown in the AMS, USDA analysis which is the source of the price data. (v)
The lower part of the table shows combined co-product values and gross margins per bushel with 15 pounds of DDGS per bushel. The lower DDGs yield is one we have heard from some processors. Returns over variable costs are shown for December 2015 using late October costs from the AgMRC ethanol model. (vi) Variable costs in the December 19, 2014 column were $1.15 per bushel. The highlighted yellow areas at the bottom of the table show approximate shut-down corn prices at the two different DDGS yield levels. These calculations are not intended to reflect actual margins at any individual plant, but only to present a general view of margins and approximate corn prices above which buying corn and processing for ethanol would not cover variable (out of pocket) costs. The Iowa data indicate margins at some plants may have reached a level where reduced production is being considered.
USDA’s Agricultural Marketing Service also provides similar comparisons for Illinois, Nebraska, and South Dakota. On December, gross returns for each of these states was modestly larger than in Iowa. Margins of individual plants that remove and sell corn oil may be larger than shown here and may allow higher shut-down corn prices than in the table above.
The last line in the table shows DDGS prices as percentages of corn. China In the past has been the leading importer of U.S. DDGS by a very large percentage, but its purchases have recently been very small. When China was a large buyer of DDGS, its prices per pound at times were 130 to 140 percent of corn prices. If China would return to the DDGS market in large volumes, that would have the potential to increase ethanol processing margins or allow lower ethanol prices to compete with gasoline.
U.S. Crude Oil Inventories
Figure 5 shows monthly U.S. crude oil inventories since January 1995. Crude oil inventories provide an indication of the relative tightness of supplies, which in turn impacts prices, availability of feedstock for producing gasoline, and potential costs of gasoline. The chart ends on December 11, 2015. Inventories have been increasing sharply since September 2014 and indicate crude oil supplies available to the petroleum refining industry are large. That and a strong U.S. dollar in international currency exchange markets are keeping gasoline prices relatively low, thus limiting the upside potential in ethanol prices.
The U.S. Energy Information Administration provides monthly biodiesel consumption and stocks data from January 1, 2009 to date. In Figure 6 below, stocks are shown as percentages of monthly consumption from March 2009 through October 2015. We adjusted the January 2010 percentage downward to 300% to bring it more in line with other monthly data. The original unadjusted data showed stocks for that month were 3350% of consumption. Reported monthly biodiesel consumption data have been highly variable, thus contributing to variability in stocks as a percentage of use. The regression trend line in Figure 6 is almost flat, implying that ethanol stocks as a percentage of consumption remain within the historical range. That in turn suggests stocks are not excessive. Biofuel mandates to be released in late November will influence biodiesel production in the next one to two years and could have some influence on future stocks.
With very low gasoline prices when compared to the last several years, there is reason to ask whether ethanol can be priced low enough to remain competitive and prevent an excessive buildup of inventories. The analysis in this report indicates that to date this has not been a problem due to EPA blending mandates. However, ethanol inventories as a percent of gasoline should be watched closely in the next several months. Since late October, that measure of ethanol inventories has shown a sharp upward trend and hint that the ethanol market may not be fully absorbing current production. Monthly biodiesel stocks as percentages of consumption have been highly variable, but have traced out a flat trend that has not created a basis for negative market impacts. Large U.S. crude oil stocks and the strong U.S. dollar imply continued low gasoline prices for at least the next several months.
i R. Wisner, “Uptrend in U.S. Gasoline Use Lifts Ethanol Demand”, AgMRC Renewable Fuels Monthly Report, November 2015: http://www.agmrc.org/renewable_energy/agmrc-renewable-energy-newsletter/?uptrend_in_us_gasoline_use_lifts_ethanol_demand&show=article&articleID=1898&issueID=564
ii Data in Figure 1 are from EIA, U.S. Department of energy: http://www.eia.gov/totalenergy/data/monthly/pdf/sec10_7.pdf and http://www.eia.gov/biofuels/biodiesel/production/
iii R. Wisner, “Implications of EPA's Proposed 2014 through 2017 Biofuels Mandates”, AgMRC Renewable Fuels Monthly Report, June 2015: http://www.agmrc.org/renewable_energy/agmrc-renewable-energy-newsletter/?implications_of_epas_proposed_2014_through_2017_biofuels_mandates&show=article&articleID=1828&issueID=549 and EPA ”Final Renewable Fuel Standards for 2014, 2015 and 2016, and the Biomass-Based Diesel Volume for 2017”, http://www.epa.gov/renewable-fuel-standard-program/final-renewable-fuel-standards-2014-2015-and-2016-and-biomass-based
iv Dan Murtaugh, “Shale boom floods market with low-octane gasoline” Bloomberg News, October 23, 2015 in State Journal-Register, http://www.sj-r.com/article/20151023/NEWS/151029767
v Data source for pries and comparisons with 17.75 lbs. DDGS: http://www.ams.usda.gov/mnreports/nw_gr212.txt
vi Don Hofstrand and Ann Johanns “Tracking Ethanol Profitability”, Ag Marketing Resource Center: http://www.agmrc.org/renewable-energy/ethanol/ethanol-profitability/