As the USDA came back from an extended Christmas break hiatus, several reports have slowly been working their way into public hands. Updated (and long overdue) numbers helped to give us a glimpse of developing trends in the last couple of months. With regard to the WASDE report, one (perhaps the greatest) point of interest was yield. The USDA lowered corn yields by 2.5 bushels and soybeans by 0.5 bushels/acre. The result was a smaller supply. Different actions were taken with regard to South American production. In the end world inventories for corn rose by nearly 1 MMT while soybean inventories fell by 8.6 MMT.
However, what went overlooked for many was what happened on the demand side of the balance sheet. Regarding corn, there were some interesting adjustments. Feed usage fell by 125 million bushels. Industrial use fell by 15 million bushels. Exports remained unchanged, but ethanol usage fell by 25 million bushels to 5.575 billion bushels. That followed a negative adjustment of 50 million bushels in the December report and continues to take away from what was the projected peak ethanol corn grind of 5.675 billion as reported in June 2018. More importantly, should this number hold, it will be the first year that the ethanol corn grind will shrink below previous years estimates since the 2012 drought.
So what gives? It is very plain and simple - low to no profitability at the plant level. Low ethanol prices (see chart above) were not great enough to offset costs. In fact, in Q4 prices reached levels not seen since 2005. There are many theories about why price was low. A full analysis of plant profitability can be found in a white paper written by the University of Illinois. Click here. Long story short, as plant profitability fell, stories regarding plant shut downs or partial closures became common headlines as harvest progressed.
Now that we are in a new year, only modest improvements in profitability have occurred. However, the story of thin or inverted profit margins is not new. A quick glance at projected plant profitability (see chart above), reminds us of such times in the past. Following periods of prolonged negative profitability, plant capacity was either mothballed or growth was stifled...a logical outcome. We expect the same in 2019. As we unpack the acreage, supply, and demand story this year, little by way of new growth is currently expected from a category that has grown 200 million bushels per year in the last couple of seasons.
In short, the ethanol grind is exactly that. So as guesses continue to fly around regarding planted acres, spring activity, etc, recognize that offsetting features continue to develop on the demand side of the balance sheet. Stay tuned. In the meantime, be sure to have spring plans in place for sales and risk management. Contact us to sort through strategies suitable to your operation.