Ethanol

China not likely to immediately impact U.S. market

China’s announcement of goal to move to 10% ethanol blend in all automobile gasoline by 2020 has received considerable attention, but what will it mean for U.S. corn prices?

China has long been in the forefront when it comes to market discussions. That’s nothing new. However, what has been receiving considerable press since Sept. 13 is China’s announcement that it wants to move to a 10% ethanol blend in all of its automobile gasoline by 2020.

There are many moving parts to this issue, and no one knows what the final outcome is going to be, but we can safely assume that this will not be negative to corn prices and has a reasonable possibility of being bullish to corn prices -- although likely not until at least 2019.

Here are the facts (or close to facts) that we know:

  • The move is being perpetuated by the call for clean air and to help eliminate the smog in China’s major cities.
  • China is the world’s largest car market and currently ranks number three for fuel ethanol consumption. This is somewhat a misconception since, on the production side, China also ranks number three (see graph), but that compares to the U.S. at 59% of the world market, Brazil at 28% and China at 3%. Yes, China is third, but it's a long way down the totem pole. All European countries combined make up 5% of the world’s production.
  • China will need about 35 million metric tons of corn per year to produce its ethanol needs. That’s equivalent to 1.38 billion bu. In the U.S., 5.5 billion bu. of corn will be crushed for ethanol this year.
  • China currently produces about 215 million metric tons of corn per year.
  • Carryover supplies of corn going into this year for China were 101.25 million metric tons and are expected to dwindle to 81.26 million metric tons by year-end.
  • Industry experts estimate that China has the capacity currently to produce about 1 billion gal., but it will need 10 times that amount.
  • China recently raised the tariff on imported ethanol from 10% to 30%.

We find that it would be unlikely for China to reach its objective of a 10% ethanol blend by 2020. China could build enough plants between now and then to make it happen, but that’s doubtful. Even China has stated that its plans do not include importing any ethanol or corn to make the ethanol domestically. Something has to give somewhere, because these objectives cannot be met without making at least one of these changes. Either China has to build plants rapidly and import corn, or it is going to have to import ethanol. It is doubtful that China even knows exactly what the plan is.

The one thing we can conclude is that this is not likely to be a bullish factor for 2018. With carryover supplies domestically in the U.S. of nearly 2.3 billion bu., there is little concern that China will whittle away that supply. There will also be considerable political and social arguments on both sides between the groups that do not want to see food prices rise and see ramping up ethanol as a sure-fire bet that food prices will go up versus the environmentalists who want clean air in major cities. It will be interesting to watch those arguments play out.

One can also argue the fact that, with the anticipation of China ramping up ethanol needs and the possibility that it will be importing corn from the U.S., the response from U.S. grain producers will be to plant more corn acres this coming year, thus adding insult to injury for a market with a large surplus already. This could turn out to be more bearish than bullish.

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