Looking Ahead: Corn Usage, Mandates, and Ethanol Production

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S. Patricia Batres-Marquez
Decision Innovation Solutions
11107 Aurora Avenue
Urbandale, IA 50322
http://www.decision-innovation.com/

The first USDA U.S. corn production projection for the 2016/17 marketing year was published in the World Agricultural Supply and Demand Estimates (WASDE) on May 10, 2016 (USDA-OCE, 2016a). The report indicated a 6% increase, to 14.430 billion bushels, compared with the 2015/16 estimate (13.601 billion bushels). If realized, corn production in the new marketing year will surpass the record 2014/15 corn production (14.216 billion bushels). This projection is supported by expanded 2016/17 planting intentions. As indicated in the Prospective Plantings report published by USDA on March 31 (USDA-NASS, 2016a), U.S. corn producers intended to plant 93.6 million acres in 2016/17, or 5.6 million acres more than last year (88 million acres).

The projected 2016/17 harvested area is up 5.2 million acres, to 85.9 million acres, compared with the 2015/16 marketing year (80.7 million acres). This projection is based on the historical relationship between harvested and planted area. For the last 10 years, corn harvested area has represented about 91.5% of corn planted area.

The 2016/17 U.S. corn yield, which USDA projected based on a weather-adjusted trend model, is 168.0 bushels per acre, down 0.4 bushels per acre relative to the 2015/16 marketing year. This projection assumes normal mid-May planting progress and summer weather, with summer weather having the largest impact on yields.

As of June 5, 98% of the 2016/17 U.S. corn crop had been planted in the 18 major corn-producing states (USDA-NASS, 2016b). This share was similar to both last year’s planting at this time (99%) and the previous five-year average (97%). In addition, corn emergence in the 18 states in the week ending June 5 was at 90%, which was about the same as last year (89%) and 4% ahead of the five-year average (86%).

The Corn Balance Sheet in June was changed by USDA based on its new projections for 2015/16 corn trade, leaving corn production, planted and harvested area, and yield for the new marketing year unchanged from the previous month’s projections. As reported in the latest WASDE report (USDA-OCE, 2016b), 2015/16 corn ending stocks were cut by 0.095 billion bushels to 1.708 billion bushels compared with last month’s projection based on an increased 2015/16 corn exports forecast (1.825 billion bushels). Larger corn export commitments at the beginning of June 2016 expanded this projection. On the other hand, because of recent corn shipments from Canada, 2015/16 U.S. corn imports were raised from 0.055 billion bushels to 0.06 billion bushels.

With projected record 2016/17 corn production and expected 2016/17 beginning stocks at 1.708 billion bushels, the U.S. new marketing year corn supply is forecast at 16.178 billion bushels. If realized, U.S. corn supply will exceed the last marketing year corn supply by 0.786 billion bushels.

Projected Corn Utilization

The 2016/17 U.S. corn utilization (14.170 billion bushels) is also projected to set a new record, with both domestic use and corn exports rising in the new projected marketing year. The two main U.S. corn usages, feed and residual (F&R) and corn used to produce ethanol, are projected at 5.550 billion bushels and 5.300 billion bushels, respectively (see Figure 1 ). F&R usage is projected to increase by 0.300 billion bushels (5.7%) from the 2015/16 estimate. As indicated by USDA (USDA-OCE, 2016a), the factors behind the increase in F&R usage in 2016/17 are a projected larger corn production, lower expected corn price, and increased number of livestock and poultry.

U.S. Corn Utilization and Ending Stocks

Figure 1. U.S. Corn Utilization and Ending Stocks (Million Bushels)

USDA’s June 2016 projection for corn use for ethanol in 2016/17 remains the same as the previous month. The projected increase in corn use for ethanol in the new marketing year is much smaller than the projected growth in corn for F&R use. Corn use for U.S. ethanol production in the new marketing year is projected to be up by 0.050 billion bushels (1.0%) relative to the 2015/16 projection (5.25 billion bushels) (see Figure 1 above). According to the USDA, forecast lower sorghum use for ethanol and the expected growth in ethanol consumption supported this projection.
Based on large projected 2016/17 U.S. corn supplies and less competition from Brazil, the latest projection for 2016/17 U.S. corn exports were up 0.05 billion bushels from the May projection (1.9 billion bushels). Brazil’s 2015/16 second corn crop production has been reduced because of dryness in some of the largest Brazilian producing areas (USDA-FAS, 2016a).

This month’s adjustment in 2015/16 trade resulted in projected tighter beginning corn stocks for the new marking year, from last month’s projection of 1.803 billion bushels to 1.708 billion bushels this month. USDA’s latest projections for the 2016/17 balance sheet indicates U.S. corn ending stocks at 2.008 billion bushels, down 6.7% from last month’s projection. Corn prices for both 2015/16 and 2016/17 were increased in the latest projections. The current projected 2016/17 corn price is in the range of $3.20 to $3.80 (mid-range equal to $3.50), which is $0.15 above last month’s projected mid-range forecast ($3.35) but down $0.20 from the mid-range of the projected 2015/16 price ($3.70).

The 2016/17 corn crop area and supplies in storage as of June 1 will be published by USDA on June 30 in the Acreage and Grain Stocks reports, respectively. Livestock inventory numbers will be reported on June 24 in the Hogs and Pigs report. The information in these three reports is based on surveys conducted by USDA during the first two weeks of June 2016. This information, as well as weather patterns, particularly summer weather conditions, will influence upcoming corn price forecasts, which in turn will influence corn ethanol producers’ expected margins.

EPA's Renewable Fuel Standard 2017 Proposed Targets and Projected Ethanol Production

On May 18, 2016, the Environmental Protection Agency (EPA) released proposed volumes for renewable fuels for 2017 under the Renewable Fuel Standard program (RFS) and proposed volumes for biodiesel for 2018 (EPA, 2016). According to the proposed rule, 2017 conventional biofuels, such as ethanol, will grow by 0.3 billion gallons, to 14.8 billion gallons, from the volume in 2016 (14.5 billion gallons). This proposed volume would be lower than the 15.0 billion gallons set by the statute for the RFS program, meeting 98.7% of the statutory target. Overall, the EPA’s proposed total renewable fuel volumes will grow about 0.7 billion gallons, to 18.8 billion gallons, in 2017 compared with the volume in 2016 (18.11 billion gallons). The 2017 proposed total renewable volume represents only 78.3% of the statutory total renewable fuel requirement for 2017 (24.00 billion gallons). Comments on the proposed rule must be received on or before July 11, 2016 (search for docket ID: EPA-HQ-OAR-2016-0004 at https://www.regulations.gov).

The U.S. Energy Information Administration (EIA) in its Short-Term Energy Outlook report published on June 7 (EIA, 2016a) cites employment growth and low retail gasoline prices as factors that will spur highway travel (up 2.5%) in 2016, increasing motor gasoline consumption by 2%, to 9.33 million barrels per day, compared with 9.16 million barrels per day in 2015. EIA is forecasting that 2017 motor gasoline consumption will remain about the same as in 2016 (9.32 million barrels per day).

EIA forecasts ethanol production to average about 0.98 million barrels per day in calendar years 2016 (0.976 million barrels per day) and 2017 (0.983 million barrels per day) compared with 0.97 million barrels per day in 2015. According to EIA, ethanol consumption is expected to average 0.93 million barrels per day in 2016 and 2017, increasing by 0.02 million barrels per day relative to 2015 (0.91 million barrels per day). EIA’s current forecasts are based on the November 30, 2015, EPA finalized volumes set for the RFS for 2014 through 2016, and the May 18, 2016, proposed RFS volumes for 2017 along with the finalized biomass-based diesel volumes for 2017. Based on the projected consumption of motor gasoline and ethanol, the ethanol share of the total gasoline pool will average 10% during 2016 and 2017. EIA projects no significant increases in E15 (ethanol gasoline blended with 10.5%–15% ethanol) or E85 (ethanol-gasoline blends containing 70%–85% ethanol) in 2016 and 2017. U.S. corn ethanol production in 2014 and 2015 reached a volume of 14.31 and 14.81 billion gallons, respectively. These production rates were above the implied conventional biofuels portion of the finalized RFS targets, which mainly includes corn ethanol, for 2014 (13.61 billion gallons) and 2015 (14.05 billion gallons) (see Figure 2). Annualizing the projected EIA ethanol production of about 0.98 million gallons per day during 2016 and 2017 would result in a level of ethanol production of about 14.96 billion gallons in 2016 and 15.07 billion gallons in 2017, which compared with the finalized RFS mandate for conventional biofuels for 2016 (14.5 billion gallons) and proposed conventional biofuel target for 2017 (14.8 billion gallons) would result in continued production rates above the RFS mandates. Under these circumstances, ethanol exports become key to the industry. In addition, through the USDA’s Biofuels Infrastructure Partnership (BIP), $210 million has been set aside for the installation of new ethanol infrastructure in 2016 to increase the availability of higher blends of ethanol, such as E15 and E85. According to the USDA (USDA, 2015), this investment will expand infrastructure by nearly 5,000 pumps at about 1,400 fueling stations. This represents an opportunity for the expansion in the use of higher ethanol blends. For a more detailed discussion about E15 and E85, see our June report.

U.S. Ethanol Production and the RFS Conventional Biofuels Target

Figure 2. U.S. Ethanol Production and the RFS Conventional Biofuels Target

U.S. Ethanol Exports

Given that 10% is the traditional ethanol-gasoline blend used domestically, an increase in corn ethanol demand would need to come from U.S. ethanol exports. Moreover, if cellulosic biofuel consumption increases according to the EPA’s 2017 proposed target, the domestic market will absorb the increase. The cellulosic biofuel proposed target for 2017 is 0.312 billion gallons compared with the 2016 volume of 0.230 billion gallons.

The latest USDA-Economic Research Service (2016) data indicates that U.S. ethanol exports during the first quarter of 2016 grew 5%, to 0.250 billion gallons year over year, whereas U.S. imports from January to March 2016 declined 85%, to 0.0003 billion gallons, compared with the same period last year (0.002 billion gallons), hence strengthening the U.S. position as a net ethanol exporter. China emerged as the top destination for U.S. ethanol during the first quarter of 2016, receiving 30% (0.075 billion gallons) of the total U.S. ethanol export during that period (EIA, 2016b). It is difficult to assess if increased demand for U.S. ethanol from China is a short-term surge or if it will be a long-term trend, which started during the second quarter of 2015. One factor that could tame the surge of China’s ethanol imports from the United States is the Chinese government’s decision to end the floor price policy for corn, announced March 28 (USDA-FAS, 2016b). The floor price has been a price support policy for corn producers in China and has resulted in high corn stocks and suppressed domestic corn demand because of artificially elevated corn prices. Unspecified (at the time of the announcement) new subsidies will be established by the Chinese government to help support corn farmers’ income. As reported in the GAIN report, the elimination of the corn floor price is causing corn prices to fall, and even though Food, Seed and Industrial (FSI) use estimates for the 2015/16 marketing year have not changed (estimated at 64 million metric tons [MMT]), projections for FSI (including ethanol) for the 2016/17 marketing year are up 3 MMT to 67 MMT because of falling corn prices. In addition, the government is subsidizing industrial corn use as a means to decrease excess government corn stocks, which could boost corn for ethanol use during the 2016/17 marketing year and reduce Chinese ethanol imports from the United States.

Other important destinations for U.S. ethanol during the first quarter of 2016 continue to be Brazil and Canada, with Brazil importing 20% (0.05 billion gallons) of the total U.S. ethanol exports during this period and Canada importing 18% (0.04 billion gallons). However, both Brazil’s and Canada’s ethanol volume of ethanol imports from the United States from January to March 2016 are below the volume imported year over year, an indication that the overall increase in U.S. ethanol exports during the first quarter of 2016 has come as a result of China’s large U.S. ethanol imports.

Exports and Future Demand

The EPA proposed target for 2017 for conventional biofuel allows for a small expansion in the ethanol market. Since 2014, ethanol production has been above the RFS finalized targets, and ethanol projections and the proposed target show a continuation of that trend. If EPA’s final mandates for conventional biofuel stay about the same as the current proposal, U.S. ethanol exports will become more relevant to U.S. ethanol demand; nonetheless, expansion and retention of ethanol demand in foreign markets is influenced, among other factors, by the economic and energy policies of important trade partners.

Sources

EIA (Energy Information Administration), 2016a. Short-Term Energy Outlook (STEO) report. June 7.

2016b. Fuel Ethanol (Renewable) Exports by Destination. Accessed June 21, 2016.

EPA (Environmental Protection Agency), 2016. Proposed Renewable Fuel Standards for 2017, and the Biomass-Based Diesel Volume for 2018. Last updated: June 1, 2016.

USDA (U.S. Department of Agriculture), 2015. “USDA Announces $210 Million to be Invested in Renewable Energy Infrastructure through the Biofuel Infrastructure Partnership.” News release, October 28.

USDA-Economic Research Service (USDA-ERS), 2016, U.S. Bioenergy Statistics Data, June. Accessed June 21, 2016.

USDA-Foreign Agriculture Service (FAS), 2016a, World Agricultural Production. June.

2016b. Global Agricultural Information Network (GAIN): Grain and Feed Annual. April.

USDA-National Agricultural Statistics Service (NASS) 2016a, Prospective Plantings Report. March 31

2016b, Crop Progress Report, June 6.

USDA (U.S. Department of Agriculture)-Office of the Chief Economist (OCE), 2016a, World Agricultural Supply and Demand Estimates (WASDE). May 10.

2016b, World Agricultural Supply and Demand Estimates (WASDE). June 10.