Ethanol Sector Outlook: Readjustment Today, Rationalization Tomorrow

June 2020 - Kenneth Scott Zuckerberg

Key Points

  • Earlier this year, the U.S. ethanol sector experienced a catastrophic demand shock stemming from reduced gasoline consumption as government authorities enacted stay-at-home restrictions designed to contain the spread of the coronavirus. The industry initially responded by cutting production nearly in half between mid-March and mid-April.
  • Motor gasoline demand has begun to recover. While weekly ethanol production has rebounded from the April trough, we do not expect a full recovery in demand in the near-term due to high unemployment, reduced attendance at public gatherings, and more people working from home.
  • We believe that lower run-rate fuel demand coupled with a rise in excess capacity (currently 1 billion gallons rising to 2.4 billion or more in 2021) will result in some rationalization of capacity. Weaker players with less efficient technology, higher leverage, high operating costs, and an inability to attract new investment capital will be forced to exit through consolidation or plant closures.
  • By 2025, we expect the U.S. ethanol industry to undergo a three-stage transformation resulting in fewer, well-capitalized players with diverse revenue sources. These could include current co-products (e.g., distiller’s grain for feed, corn oil for biodiesel and liquid carbon dioxide for freezing and chilling, and carbonated beverages), as well as other products being developed (e.g. high protein distiller’s grains or further distillation for enhanced product purity).
  • Two factors could derail this transformation: the combination of an ethanol industry-wide bailout and a faster-than-expected economic recovery. Low interest rates, which are expected to persist for some time, would allow weak operators to continue operating without the need to transform.

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