Interrelated CO2, ethanol, gasoline markets all disrupted by COVID-19

Data just released by the U.S. Department of Agriculture shows ethanol exports through the second week of April are slightly up compared to the same date a year ago, by 3%. But the data behind those figures has not yet registered the severe disruptions to the interrelated carbon dioxide and ethanol markets by the COVID-19 outbreak and the shutdowns it has caused.

The USDA figures, released the second week of April, showed that United States ethanol exports increased year-over-year to 812 million gallons (288 million bushels of corn equivalent) in the first six months of the marketing year. The top destination was Brazil, at 201 million gallons (71.3 million bushels of corn), despite a slight decline related to tariff restructuring in Brazil and a strengthening U.S. dollar. The European Union had a 28% increase from 2018-19 imports at 79 million gallons (28 million corn bushels).

COVID disruptions not yet captured

However, as the U.S. Grains Council pointed out, “These data points were not able to take into account the still-developing impacts of COVID-19 and oil production disputes, which have led to deep decreases in demand for gasoline and shifts in the relationship between oil and ethanol prices.”

Brian Healey, director of global ethanol market development for USCG, said, “The world is going through an unprecedented level of disruption, where every individual and industry is impacted by global restriction set in place to reduce new cases of COVID-19.”

Oil, ethanol, CO2

A podcast posted April 9 by experts at IHS Markit sheds some light on the complex relations among the oil, ethanol and CO2 markets, all three of which are important to farmers and food processors., and how the COVID-19 crisis affects them.

Kevin Lindemer, a managing director at IHS Market, explained that the shutdown of much of the gasoline-consuming part of the economy has resulted in crashing global demand for gasoline. He said he expects U.S. demand for gasoline this April to be 50% below that of last April, due to less driving from those working at home as well as closures of restaurants and other businesses. Since ethanol is blended into gasoline at 10%, there will be a mirroring decline in ethanol demand. Export of U.S. ethanol will decrease as well, especially in those countries that produce it, as their own lockdowns have similar effects.

Lindemer estimates that ethanol plants have shut down 3 to 3.5 billion gallons of capacity as of April. Some plants have closed completely, while others are turning down capacity. Only a handful of those closed plants, however, have the ability to capture CO2., a byproduct of ethanol production. He concluded that the CO2 supply issue may be more a future concern than an immediate issue of structural change.

Food industry uses of CO2

The food and beverage industry uses about half of all industrial CO2, and is the largest user of liquid CO2, according to Bala Suresh, head of IHS Markit’s industrial gases unit. Food processors use it for frozen foods, chilling, refrigeration, inhibiting mold, acidifying sparkling beverages and beermaking.

Meatpackers use CO2 not only to chill and preserve meat, and to absorb heat from meat grinding operations, but also to stun animals before slaughter. Suresh said it was meatpackers that first reported local shortages of CO2. He said 29 of the 45 U.S. ethanol plants that sell CO2 commercially have cut production. Although there is plenty of reserve capacity, not all of it is located where it is needed. In the U.S., CO2 demand is local. It rarely travels more than 200 miles from its point of production.

According to IHS Market policy analyst Roger Bernard, meatpackers have asked the USDA to allow them to use lower grades of CO2 during the crisis. Although the USDA has issued no formal permission, he said this was tacitly being allowed.

There is also a request to allow the Commodity Credit Corporation to use its authority to prop up corn prices by subsidizing ethanol plants’ feedstock (i.e., corn) purchases. The CCC has between $7 billion and $9 billion remaining from its annual $30 billion borrowing authority for the year. The CARES Act added another $14 billion to that authority, said Bernard.

The oil industry uses most of the rest of industrial CO2 to pressurize wells. That demand, too, has decreased, mostly due to the drop in oil prices caused by a price war between Saudi Arabia and Russia. That dispute was recently resolved by a new deal between Russia and OPEC mediated by the Trump administration.

For more information, listen to the IHS Market podcast at https://ihsmarkit.com/research-analysis/podcast-covid19-impacting-supply-of-co2.html

David Murray can be reached at [email protected].