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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.

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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.

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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.

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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.

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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

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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.

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

Figure6.ProjectedimpactsofCOVID-19ondemandforcornduetoreductioninsupplyofethanolin2020fortheexaminedscenarios.

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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).

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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

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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.