The coronavirus pandemic has closed several ethanol plants across the United States as margins slip. Not only do you lose a place to sell your grain, but also the relationships you have spent years or even decades building up. Rodney Connor and Gabe Sheets-Poling assess the current landscape of shuttering buyers, keeping the big picture of corn supply in mind.
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Rodney: I don't know if you've been following ethanol lately, Gabe?
Gabe: I've been in ethanol a little bit.
Rodney: It's been in the news a little bit.
Gabe: Little bit.
Rodney: Yeah. So margins aren't there. Actually margins haven't been there for quite a bit. It turns out $20 oil, not great for ethanol margins. I don't know if you have done the math there.
Gabe: So you would say they took a tough situation and made it worse.
Rodney: Yeah, exactly.
Rodney: I said that we've been really touting basis is strong, basis is strong, and a lot of that, in corn specifically, has been driven by ethanol demand. So they couldn't get their hands on any corn and basis was really, really strong. So I think it was about two weeks ago that ethanol essentially said, "Hey, I'm out. We don't really have interest in buying any corn anymore," which had some dramatic effects on the country.
Gabe: I believe, most of that ethanol grind is happening in the Northern States and to the West there, not that that's the only place where there are ethanol plants. So are there any, I would say, areas of States that you see are particularly struggling there or are you seeing a basis fall across the board?
Rodney: So it's interesting how basis works. Essentially, if you work under the assumption that every buyer wants to buy grain as cheap as possible.
Gabe: That seem reasonable.
Rodney: Yeah. They're buying grain essentially for the least amount they can, compared to their next best alternative for the farmer. So for the most part, what these ethanol plants have done, is built in places of weak basis. So there's some logistical things that go into that, but a great place to build an ethanol plant 10 years ago or 15 years ago was Northwestern Iowa, a long ways from anything good as far as basis. So that's where I think about when I think about ethanol is away from the river, away from rail, any kind of rail that's going to get us down to the Southwest or whatever from that part of the country. Where was I headed with that? Oh yeah.
Gabe: The broader impact, are we seeing, is it market wide or is it really more specific to those interior locations?
Rodney: Yeah. So what happens is everybody, again, if we work under this impression that everybody is buying grain as cheap as possible, what happens is when you get a few players that say, "Hey, I'm not interested in buying corn today." The best way to not buy corn is to pay a very low price for it. So specifically, lower than the next best alternative. So you picture an ethanol plant paying whatever, 10 under and all of a sudden they say, "You know what? I'm going to be 30 under." So they don't buy grain anymore. Well, what happens is all those commercial elevators that feed that ethanol plant as they need grain that were paying 20 under, are now paying too much. So they drop their bid. If you could watch it visually on a map, it would look like an explosion. It's going to work its way out in circles.
Gabe: So does it go through multiple cycles at coming off? So if I was the ethanol plant and I dropped to be below everybody and then everybody else that was feeding me dropped even more, does it chase itself down and does that happen really quickly or is that something that will take weeks or months to really see it come to rest?
Rodney: Yeah. So it depends on how it happens. But I would say this latest round was really, really quickly. It was lightning fast that we saw that roll through everywhere. What's interesting is you see that initial reaction, that happens really quickly and then you see like this soft adjustment. So in this case, that adjustment was, "Oh, actually we should probably be a little weaker than our gut reaction was." But we have seen instances in the past where, hey, everybody dropped 10 cents and then two days later the market's like, actually we should only dropped a nickel. So you see a reaction both ways.
Gabe: But it's a pretty quick turnaround to where it re-stabilizes, that demands out, figures out the equilibrium.
Rodney: Yeah, that happens really quickly. I think, the thing I've been thinking about lately is, as we build out Marketplace and as we've gained market share, I hear a lot of conversations where, people say, "Ah, I'm not that interested in Marketplace." And ethanol plants are one of those specific places where the guy says, "Hey, look, I sell my grain to the ethanol plant. They're the best bid in town. I'm good. Right? I don't need this Marketplace thing." And I think about those guys today, to have that much invested in that relationship.
Rodney: And I really think farmers, at least the ones I know, are heavy relationship guys. They like to deal with people they know and trust. And I just this week had been thinking about those guys that for the last 10 years have been selling to this ethanol plant pretty much 100%, and I'm sure that's the case, like 100% market share for a lot of these guys, that suddenly this ethanol plant is gone and how they deal with the fact that, "Oh man, I've got, apparently, a rather large crop coming at me again." And "I need to find an appropriate relationship to deal with that."
Gabe: Have you seen the reaction from many feedlots? It seems like over the, even just the last couple of years, a lot of those guys have really evolved to lean into the DDGs, which I think took a while to find a home, consistently in feed. But obviously, so production there has slowed as well. How have you seen the feedlots react? Because I know a lot of the guys there aren't used to sourcing direct from farmer and to rely on brokers or those larger ethanol plants.
Rodney: Yeah. So that's more friction to come. So those guys, I think they gobbled up those last bit of DDGs that were available. So they're not gone, but there's significantly less. And I think there was a scramble to get on that comfortable supply of DDGs. And now here we sit. A lot of these guys, yeah, I think you're right, I think a significant chunk of their feed came from this one place. Again, back to the relationship side of things. This is where I get it, now what? So it'd be interesting to watch, to your point, a lot of that could be supplied with farmer direct type stuff.
Rodney: Although I'm not a cattle guy, I just found out you can't feed cattle all corn. I guess that makes sense.
Gabe: What else are you going to feed them, Rodney? I'm excited to hear this.
Rodney: I don't think people are going to come to this podcast to hear my thoughts on feeding out cattle, but yeah. Roughage is the thing. So yeah, they're going to have to find those other sources for it. And again, ethanol's not dead. In the end, we probably took out, 500 million bushels of demand, which is what, not even 20% of that market. That's a lot, but it's not the end of the world.
Gabe: Right. And that demand will shift. Because feed'll need to... while you may not be able to just feed cattle on corn, you can finish them on corn and if they were using DDGs, they're going to need those calories. The impact to supply shouldn't be as big as it looks like when you just look at... or I'm sorry, the impact on demand shouldn't be as bad when you just look at the ethanol plant on its own.
Rodney: Yeah. So on the demand story, it takes me back to the tariffs with China. So when the Chinese tariffs came out, specifically against the US, it was like, "Oh man, we got all these beans that we're supposed to ship and now what do we do with them?" Well, it turned out the math was rather easy. Canada just took their beans and shipped them to China and then imported US beans to use on their own stuff. So that sounds efficient, but what was crazy, I worked for a company that loaded containers at the time, was how difficult it was to start up business with companies that you hadn't done business with before. We had relationships built with people that ship directly to Southeast Asia. So that was easy, no problem. But suddenly to find a guy that was shipping to Canada, is a whole new ball game. Whole new people, credit limits. Do I trust you? Do I like you? I don't know, probably a few beers here and there to try to gain business, but that's inefficient and it's expensive.
Gabe: Well, and the logistics aren't there. The whole US system is meant to go East, West, or down the rivers. We don't go into colder worlds all that often.