China ethanol could lift grain prices

01.06.2018

A plan to implement a 10 percent national ethanol mandate by 2020 would create an annual market for 19 billion litres

The world’s second largest ethanol producer is gearing up for a big new source of demand that will double its profit margins and could take grain prices on a ride.

Ray Guy Young, chief financial officer of Archer Daniels Midland Company, said China’s plan to implement a 10 percent national ethanol mandate by 2020 will create a market for 19 billion litres of ethanol annually.

He told delegates attending the BMO Capital Markets’ Farm to Markets Conference that China has 3.8 billion litres of ethanol capacity and should be able to double that by 2020.

That leaves 11.4 billion litres that would have to be imported to meet its mandate.

Young said there are punitive tariffs in place right now preventing sales to China.

But there is a need to address the trade imbalance between China and the U.S. and increasing ethanol exports to that country would be one way to shrink the gap while helping China meet its ethanol mandate.

“So therefore, looking over the medium term, we’re actually feeling optimistic that, that could create the potential in order to help us kind of drive ethanol margins in this industry back to the levels that we thought we were going to be,” he said in a transcript of his remarks published on ADM’s website.

He believes the new demand out of China will push ethanol margins to 30 to 40 cents per gallon, which is double what they are today.

Jim Grey, chair of Renewable Industries Canada, said anything that increases demand for U.S. ethanol is also good for the Canadian ethanol sector.

“It just increases the demand for ethanol from North America and that’s going to have a very, very positive impact on margins,” he said.

Grain industry analysts say China’s proposed mandate could have a huge impact on corn and other grain prices but they are stressing caution because government policy in China is unpredictable.

Bruce Burnett, director of markets and weather with Glacier MarketsFarm, said the mandate could be reduced or delayed as fast as it appeared out of nowhere.

He also wonders about ADM’s assessment that China will rely on importing 11.4 billion litres of ethanol rather than rapidly building production capacity at home.

“I never underestimate China’s ability to build things and to get those things going in a hurry if they put their mind to it,” said Burnett.

However, watch out if the policy does come to fruition and China needs to rely on imported U.S. ethanol to meet the demand rather than feeding its own plants with its massive government stockpile of corn.

He was already feeling good about corn fundamentals due to reduced crops in South America and strong demand from the livestock and ethanol sectors. If China’s proposed mandate materializes, that would take his optimism to a new level.

“You do run the risk of corn supplies being overwhelmed by the demand. That would be very positive for prices,” said Burnett.

Dave Reimann, market analyst with Cargill Canada, agrees with Burnett that China is unpredictable and there is no guarantee that it would be importing corn-based ethanol from the U.S.

But if the policy is implemented, it would require massive amounts of some sort of feedstock from somewhere and that new source of demand will be good news for lots of crops.

“More demand is always a better thing and it tends to support prices for corn, which tends to support prices for barley and so on,” he said.


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