OPINION: What it means when corn prices follow oil in an uncertain market

My opinion on the coronavirus’s capacity to impact agricultural markets has not changed since the pandemic started to develop. People will continue to eat, and even the practice of social distancing or self-isolation will not substantially impact the amount of food which society will consume.
There’s certain to be big changes in where we eat, and who we might share our meals with, but there’s no cause to believe that total food consumption will be radically different. However, regardless of a relatively stable demand for food, Ontario grain markets are still vulnerable to the public health emergency through our reliance on the ethanol market. When people travel less, they burn less gasoline.

For nearly a decade now, North American grain markets have been heavily reliant on ethanol production as an end-user of corn. Biofuel now represents almost one third of the consumption of corn on this continent, and when people are required to self-isolate or shelter in place, demand for gasoline dries up.

The petroleum industry was not having a very good year even before the COVID-19 outbreak began. The inability of OPEC and Russia to reach an agreement on oil production quotas and Saudi Arabia’s reaction to that lack of co-operation, had already put the crude oil markets into a tailspin even before North Americans were being asked to work from home and avoid all but essential travel. Petroleum producers (and by default, ethanol producers), are now operating in a marketplace where the cost of production far exceeds the retail price. In the first week of January 2020, West Texas Intermediate Crude Oil was trading in the low $60s per barrel, by the third week of March it was as low as $22 (in the third week of March in 2019 it was also around $60/barrel). Watching prices plummet to a third of their typical value would be a bit like riding soybeans from $12/bu to $4/bu. The only time that Canadian farmers have seen that scale of market collapse would have been cattle prices during the BSE crisis 17 years ago.

Ethanol futures have fared slightly better than crude oil, but the price decline is still significant. The CME ethanol futures dropped from $1.48 to $0.88 during the past month. This highlights two key challenges for the ethanol industry: First of all, the price does not support profitable production of corn-based ethanol, and secondly, with consumer travel essentially at a minimum, there’s not enough gasoline being burnt to require much ethanol to blend.

By March 23, after essentially one week of widespread COVID-19 social distancing in North America, the American Renewable Fuels Association reported that about 2 billion gallons of the United States’ 15 billion gallon ethanol manufacturing capacity had been idled. It’s significant to corn marketers that 13 % of the ethanol production capacity was shut down so quickly, and it’s equally important to note that ethanol inventories rose during the same week, which indicates consumption dropped by more than 13 %, and more production slowdowns are imminent. In researching estimates of how much gasoline consumption might drop during this period of social distancing, analyst’s estimates ranged from a 15 % to a 60 % decline in automobile fuel usage. Such a wide range in estimates really suggests that we haven’t yet got a clue of how deep the slowdown could be. Except that it’s certain to be substantial and we need to keep an eye on it.
North American ethanol manufacturers use about 415-million bushels of corn each month, so if we assume that gasoline consumption drops by 30 % for one month, it would reduce corn usage by 125 million bushels. Since there’s no other use for corn that’s going to emerge during this period of economic uncertainty, it’s safe to assume that we’ll simply add the 125-million bushels to the 2019 crop carry out for each month that the social isolation policies remain in effect. While 125 million bushels sounds like a big volume, it’s actually less than 1 % of North America’s total annual corn crop, so we could be looking at changing U.S. corn ending stocks from 13 % to 14 % or 15 %, due to changes in gasoline demand. We won’t suddenly be unable to ship remaining 2019 corn inventories because demand dried up, but projected increases in 2019 crop ending stocks will certainly put downward pressure on price.

In mid-February, we would have said that old crop corn stocks in eastern North America were tight, and while that’s still basically the case, the supply crunch is less worrisome with each passing day. In all likelihood, the COVID-19 issue will be largely resolved long before we get to harvesting the 2020 crop but as the public health emergency unfolds, keep a close eye on gasoline consumption. It has a significant impact on corn price and marketing opportunities.