impact of covid-19 on the biofuels industry and implications ......results are presented in table 1....

1|©2020PurdueUniversity

April13,2020

Impact of COVID-19 on the Biofuels Industry and Implications for Corn and Soybean

Markets ByFarzadTaheripourandJamesMintert

1.IntroductionSincetheappearanceofCOVID-19inChinainlate2019anditsrapidspreadacrosstheworld,demandforcrudeoilhasdeclinedsharplyduetoreductionsineconomicactivities,whichhasledtoalargedropincrudeoilprices.Inaddition,competitionamongmajoroilproducershasfurtherpusheddownthepriceofcrudeoil.AsshowninFigure1,thepriceofcrudeoilfellfrom$61.14inDecember31,2019to$14.10inMarch30,2020.

Figure1.CushingOklahomaSpotPrice(FOB)ofcrudeoil,Daily,April5,2019-March30,2020.

Thedeclineinoilpricesresultedinpricesfortransportationfuelsdecliningaswell.Forexample,asshowninFigure2,theaveragemonthlyrackpriceofunleadedgasolinefellfrom$1.82pergalloninDecember2019to$1.14inMarch2020.Atthesametime,theaveragemonthlyrackpriceofethanoldeclinedfrom$1.32pergalloninDecember2019to$0.82inMarch2020.


Figure2.Omahamonthlyaverageunleadedgasolineandethanolaveragerackprices,January2019-March2020.

Thesharpdeclineinthepriceofethanolreducedethanolproducers’profitmargin.AsshowninFigure3,basedondailydatafromIowaStateUniversity’sCenterforAgriculturalandRuralDevelopment(CARD),theaveragereturnabovevariablecostsforIowaethanolproducersdeclinedfromabout35centspergalloninlateNovember2019to-7centspergallononMarch27,2020.ThereductioninprofitabilitypergallonofethanolproducedisnottheonlyconsequenceofCOVID-19forethanolproducers.Reductionsineconomicactivitiesresultingfromsocialdistancingandmandatoryshelterinplaceruleshavenegativelyaffectedthedemandforgasolineandhenceforethanol,duetothe10%blendrule.Today,about96%oftheUSpopulationislivingundersomerequiredrestrictivemeasurestolimitthespreadofCOVID-19.Therefore,duetothelackofprofitabilityinethanolproductioncoupledwithreduceddemandforgasoline,ethanolproducersareexpectedtoeitherreducetheirproductionlevelsor,insomecases,simplyshutdowntheirplants.SincealargeportionofcornproducedintheUS(about38%)isusedtoproduceethanol(andDDGS),thelackofdemandforethanolwillcausealargedeclineincorndemand.


Figure3.EstimateddailyreturnabovevariableproductioncostsforIowaethanolproducers,September9,2019-March27,2020,IowaStateUniversity,CARD.

Demandfordistillatefueloil(dieselfuelsandfueloils)hasalsofollowedadiminishingtrendinrecentmonthsduetothereductionineconomicactivitiescausedbythespreadofCOVID-19.Forexample,accordingtothedataprovidedbytheEIA1,consumptionofthesefuelshasdeclinedby11.3%inthefirsttwomonthsof2020comparedtothefirsttwomonthsof2019.Thereductioninthepriceofcrudeoilandreduceddemandfordieselfuelpusheddowndieselfuelpricesaswell.Forinstance,theretaildieselprice,whichwasabout$3.05pergalloninJanuary2020,declinedto$2.56pergalloninthelastweekofMarch20202.Thisledtoamajorreductioninthepriceofbiodieselfromabout$1,050permetrictoninearlyJanuary2020to$735permetrictonattheendofMarch2020.Weakerdemandfordieselcouldalsoreducedemandforbiodiesel,whichwillleadtoreductionsindemandforbiodieselfeedstocks.Amongthesefeedstocks,soybeanoilhasthelargestshareintheUSmarket.Hence,anymajordeclineindemandforbiodieselwouldreducedemandforsoybeansaswell.

TheaboveanalysessuggestthatthespreadofCOVID-19willnegativelyaffectdemandsforcornandsoybeansduetodeclinesindemandsforethanolandbiodiesel.Inwhatfollows,weassessthemagnitudesoftheseeffects.SincetheconsequencesofCOVID-19areveryuncertain,threepossiblescenariosareassessedtocoverawiderangeofpotentialoutcomes.

2.ImpactsofCOVID-19ondemandforethanolandcornTheanalysisbeginswithrecentworkbyIrwinandHibbs(2020)3.TheyestimatedtheimpactsofCOVID-19ondemandforcornduetoexpecteddeclinesinethanolproductionforMarch,April,andMayof2020withanexpectationthateconomicactivitywillreturntonormalbyJune.However,inearlyAprilabout96%oftheUSpopulationwasstillunderashelterinplaceorderandtheexistingevidencesuggeststhattheinterruptionsineconomicactivitiesarenotlikelytodisappearbytheendofMayandcouldbeextendedbeyondthat,ascanbeinferredfromFigure4.


Figure4.NumberofofficiallyreportedCOVID-19casesforfourcountrieswithhighspreadratesincluding:China,France,Italy,andtheUS.ExceptforChina,theoriginsofthehorizontalaxesrepresentthedateoffirstobservation.TheoriginforChinarepresentsthedaythatChinaofficiallyannouncedtheoutbreak.ThelastobservationisApril3rd,2020forallcountries.Datasource:https://ourworldindata.org/coronavirus

ThisfigurerepresentsthenumberofofficiallyreportedCOVID-19casesforChina,France,Italy,andtheUS.Regardlessofthedifferencesinthesocioeconomicdeterminantsforthesecountries,thisfigureshowsrelativelysimilartimelinesforthepathofexpansioninthenumberofCOVID-19cases.ChinaofficiallyreportedabouttheoutbreakofCOVID-19inDecember31,2019.However,earlycaseswereactuallydetectedinChinainmid-November2019.Hence,ittookaboutfourandahalfmonthstostopthespreadofCOVID-19inChina.FranceandItalyreportedtheirfirstcasesinlateJanuary.Afterabouttwomonths,theyreachedthepointwherethenumberofcasesgrewexponentiallyandarestillatthebeginningoftheclimbingpath.TheUSobserveditsfirstcaseafewdaysbeforeFranceandItalyandisnowclimbingupthecurvewithaverysteepslopeanditmaytakemultipleweekstoreachthetopofitscurve.Therefore,atthistimeitisreasonabletoextrapolatethattheshelterinplaceandotherrestrictivemeasuresthatlimitcommunicationandinterrupteconomicactivitieswillstayinplaceatleastthroughAprilandpossiblyseveralweeksbeyondthat.Evenaftertheremovaloftheseorders,itisveryunlikelythateconomicactivitieswillimmediatelyreverttobusinessasusualconditions.AreportdevelopedbytheWorldBankGroup4incollaborationwithPurdueUniversity’sGTAPCenterindicatesthattheglobaleconomywillsufferharshlyduetothespreadofthisvirus.Hence,giventheaboveanalysis,it’sassumedthattheshelterinplaceorderswillremaininplacefullyacrosstheUSinAprilandtheywillbeliftedgraduallyovertime.


IrwinandHubbs(2020)positthatshelterinplacerequirementswilleffectivelyreducegasolineusageby50%whileshelterinplaceisineffect.Giventhatthereisnosolidinformationtoclarifytheaccuracyofthisassumption,auniformdistributionfortheimpactofshelterinplaceongasolinedemandisassumedwithameanof50%andlowerandupperboundsof40%and60%,respectively.Also,since96%oftheUSpopulationiscurrentlyundertheshelterinplaceorder,weassumethatthisorderwillbeextendedtoallstates.Basedontheseassumptions,thefollowingthreescenariosareconsideredforthepossibleimpactsofCOVID-19ongasolineandethanolconsumption:

ScenarioI:LowImpactwith40%reductionindemandinApril;ScenarioII:MediumImpactwith50%reductionindemandinApril;ScenarioIII:Highimpactwith60%reductionindemandinApril.

Foreachofthesescenarios,itisassumedthattheimpactwilldiminishovertimethroughouttheremainderof2020.Ineachscenario,forMay,June,andJulytheimpactsareassumedtodiminishby10%permonth.Therefore,theJunereductionratesforthelow,medium,andhighscenariosare10%,20%and30%,respectively.TotakeintoaccountrecessionineconomicactivitiesbeyondJuly,thereductionrateswerelinearlydroppedtoreachthereductionratesofabout5%,7.5%,and10%inDecemberforthelow,medium,andhighimpactscenarios.Withthesedefinedtrends,the2020overallreductionratesindemandforgasolineforthelow,medium,andhighimpactsscenariosareabout12%,17%,and23%.Figure5representsthemonthlyreductionratesforthedefinedscenarios.Thesehypotheticalpathwaysreflectdifferentpotentialoutcomesthatmayoccurintherealworldandareallsubjecttomajoruncertainty.NotethatFigure1alsoshowsthepercentagereductionsingasolineusageprojectedbyIrwinandHubbsforMarch,April,andMay.

Figure5.ProjectedimpactsofCOVID-19ongasolinedemand:Monthlyreductionratesindemandforgasolinefortheexaminedscenarios


Giventheaboveprojectedmonthlyreductionratesinthedemandforgasoline,andgiventheEIAprojecteddemandforgasolinein2020(notconsideringtheCOVID-19impacts),themonthlyreductionsinquantitydemandedofgasolineareestimated.Then,assumingablendrateof10.1%(seeIrwinandHubbs(2020)fordetails),thereductionindemandforcornethanolisprojectedandresultsarepresentedinTable1.TheestimatedreductioninU.S.ethanolusagerangesfrom1.7to3.3billiongallonsin2020.Tohelpputthisincontext,considerthatquantityistheequivalenttoabout11%to21%ofethanolproducedintheU.S.during2019,representingahugelossindemandfortheethanolindustry.

Table1:ImpactsofCOVID-19ondemandforcornethanol:Projectedreductionsfortheexaminedscenarios(figuresareinmilliongallons).

Assumingthatabout2.9bushelofcornisneededtoproduceonegallonofethanol,thereductionincorndemandduetothereductioninethanoldemandisestimated.SincereductioninethanolproductionleadstoreductioninDDGSsupply,assumingthatthelivestockproducerswillsubstituteDDGSwithcorn,wecalculatedthenetreductionincorndemand.Forthiscalculation,weconsidered5.7poundsofDDGSpergallonofethanol.ThemonthlyresultsarepresentedinTable2andtheoverallresultsfor2020isshowninFigure6.Theseresultsshowthatthegrossdemandbytheethanolindustryforcorncouldgodeclineby600millionbushelstoasmuchas1,139millionbushels.However,iflivestockproducerssubstitutecornintheirrationsinplaceofDDGS,toaccountforreducedavailabilityofDDGS,thenthenetdemandforcornwoulddeclineby423to803millionbushels.TheselargedemandreductionsareexpectedtopushestimatedcornendingstocksupdramaticallyandhaveaverynegativeimpactoncornpricesreceivedbyU.S.producers.


Table2.ImpactsofCOVID-19ondemandforcorninducedbyreductionindemandforcornethanol:Projectedreductionsfortheexaminedscenarios(figuresareinmillionbushels).

Figure6.ProjectedimpactsofCOVID-19ondemandforcornduetoreductioninsupplyofethanolin2020fortheexaminedscenarios.


3.ImpactsofCOVID-19ondemandsforbiodieselandsoybeansTheimpactofCOVID-19ondemandforbiodiesel,soybiodiesel,andsoybeanswouldlikelybesmallerthanitsimpactongasoline,ethanol,andcorndemandforseveralreasons.First,consumptionofdieselfuelmaydeclinelessthantheconsumptionofgasolineduetothereductionindemandfortransportation.Dieselfuelismainlyusedinheavydutytrucks,agriculturalmachinery,constructionequipment,andotherindustrialactivities.Hence,whileitsdemandisexpectedtodropduetoreductionsineconomicactivities,theshelterinplacerestrictionsmaynotreducedieseldemandasmuchasexpectedforgasoline.Second,theshareofbiodieselindieselfuelconsumptionisnotlarge(2.9%in2019accordingtotheEIAreport5),andfinally,only51%ofbiodieselisproducedfromsoyoilfeedstockin20196.Intheabsenceofotherevidence,therateofreductionindemandfordieselduetoCOVID-19ineachmonthisassumedtobehalfoftherateofreductioningasoline,asprojectedinFigure5.Then,giventheshareofbiodieselindieselconsumption,thereductioninthequantitydemandedofbiodieselisestimated.Finally,accordingtotheshareofsoyoilinbiodieselfeedstocks,Table3providesestimatedreductionsinsoybiodieselbymonththroughtheendof2020.

Theseresultsindicatethatdemandforbiodieselcouldgodeclineby122to219milliongallonsin2020,duetothespreadoftheCOVID-19.Toputthisincontext,thisistheequivalenttoabout7%toasmuchas13%of2019U.S.biodieselproduction.Thesearemajorreductionsforthebiodieselindustry.Thecorrespondingestimatedreductionsinsoybiodieselrangefrom62to111milliongallons.

Table3:ImpactsofCOVID-19ondemandforbiodieselandsoybiodiesel:Projectedreductionsfortheexaminedscenarios(figuresareinmilliongallons).


Table4.ImpactsofCOVID-19ondemandforsoybeansinducedbyreductionindemandforsoybiodiesel:Projectedreductionsfortheexaminedscenarios(figuresareinmillionbushels)

Finally,assuming7.68poundsofsoyoilareusedpergallonofsoybiodiesel,anda20%crushingrate,Table4providestheestimatedreductioninquantitydemandedofsoybeansforeachmonththroughtheendof2020.Theseresultsindicatedthatsoybeanusagecoulddeclinebyapproximately40to71millionbushelsin2020,duetothespreadoftheCOVID-19.Thisisabout1%to1.6%of2019USsoybeanproduction.Therefore,theimplicationsCOVID-19onsoybeandemandarisingfromreducedbiodieselusagecouldbesignificant,butareexpectedtobemuchsmallerthantheimpactoncorndemandarisingfromreducedgasolineusage.

3.ConclusionThisreportshowsthatthespreadofCOVID-19intheU.S.isexpectedtoreducethedemandforbothcornandsoybeansduetoreductionsindemandforethanolandsoybiodiesel.Thelikelyreductionindemandforcornisquitelargeandwillboostcornendingstockssubstantially,leadingtoasignificantreductioninthe2019and2020marketingyearaveragepricesforU.S.corn.Theexpectedreductioninsoybeandemandissignificant,butitismuchsmallerthanforcornandwillleadtoamuchsmallerimpactonsoybeanendingstocksandmarketingyearaveragepricesreceivedbyU.S.producersthanforcorn.

1 See March 2020 Monthly Energy Review at: https://www.eia.gov/totalenergy/data/monthly/pdf/mer.pdf 2 For biodiesel historical prices see: https://www.neste.com/corporate-info/investors/market-data/biodiesel-prices-sme-fame


3 Irwin, S. and T. Hubbs. "The Coronavirus and Ethanol Demand Destruction." farmdoc daily (10):56, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, March 26, 2020. 4 Available at: https://www.worldbank.org/en/region/eap/publication/east-asia-pacific-economic-update. 5 The total supply of distillate fuel oil (including renewable diesel and biodiesel) was about 62 billion gallons in 2019. In this year total production of biodiesel was about 1.8 billion gallon. For detail see March 2020 Monthly Energy Review at: https://www.eia.gov/totalenergy/data/monthly/pdf/mer.pdf. 6 The 51% share for soy biodiesel is obtained based in the EIA for biodiesel feedstock report. This report is available at: https://www.eia.gov/biofuels/biodiesel/production/. Note that this share could change due to the expected change in feedstock availability in 2020. However, it is not clear in what direction it may change. Therefore, in this report we assume it will remain the same as 2019. Related article: Taheripour, F. and J. Mintert. “COVID-19 Weakens Ethanol Demand Leading to Reduction in Corn Usage Forecast.” Department of Agricultural Economics, Purdue University, April 13, 2020.

impact of covid-19 on the biofuels industry and implications ......results are presented in table 1....

Documents