Cautious optimism looms over US ethanol markets into 2024 after near-3-year lows to end the year

The US ethanol industry awaits key policy support in 2024 after markets tumbled to near 3-year lows to end the year.

Despite the slide in values observed in the fourth quarter, US ethanol producers enjoyed positive margins for the entirety of 2023, a feat that has been rare in the ethanol industry over the last decade. According to S&P Global Commodity Insights, the average cash margin in 2023 was 41 cents/gal, compared with 9 cents/gal in 2022.

S&P Global calculated the US ethanol cash margin in positive territory for the entirety of 2023, peaking at 88.33 cents/gal Sept. 14, the highest level since December 2021. After reaching the September high, margins have slowly begun to erode as ethanol values fell to multi-year lows.

US Energy Information Administration data showed that the average of weekly ethanol stocks in 2023 was 2.70% lower than that of 2022. Meanwhile, according to S&P Global, US Corn CIF New Orleans reached its' lowest level since late 2020 and has trended significantly downwards for most of 2023. Market sources cited these factors, tight inventories and cheap corn, as primary drivers of the historically consistent production margins.

Strong production in the fourth quarter of 2023 paired with softening gasoline markets pushed ethanol values to their lowest levels since January 2021. Upon reaching the near 3-year lows, prices were approaching a floor, according to a market source, "but margins are still positive and there are no real bullish drivers on the radar."

Logistics issues, tight stock levels

According to data provided by the US Energy Information Administration, the average of weekly domestic stocks in 2023 as of the week ended Dec. 15 was 23.101 million barrels – 640,000 barrels lower than the 2022 average. Market sources have echoed that logistic issues and delayed shipments were a theme in 2023, leading to tight supply across various regions in the US.

Particularly tight supply was seen in the New York Harbor region during the second half of 2023, as the weekly average of regional stocks from July-December was 6.821 million barrels. In 2022, the weekly average of regional stocks during that same period was 7.287 million barrels.

Industry awaits policy support

Heading into the new year, the US ethanol industry awaits policy support from the federal government, which, if realized, could help spur growth in 2024 and beyond.

The Environmental Protection Agency in a recent court filing said it plans to issue a final rule by March 28, 2024, responding to eight Midwest governors' petitions to allow the year-round sale of a gasoline blend containing up to 15% ethanol (E15).

As it currently stands, the EPA prohibits the sale of E15 in conventional gasoline markets from June 1-Sept. 15 due to restrictions on air pollution during the summertime. If the EPA rules in favor of the governors' petitions, E15 would be allowed to be sold year-round in Illinois, Iowa, Nebraska, Minnesota, Missouri, Ohio, South Dakota and Wisconsin.

The EPA sent a draft final rule to the White House Office of Management and Budget for interagency review that is expected to side with the governors' petitions and spur greater blending of ethanol in gasoline sold in the Midwest.

The US Department of the Treasury Dec. 15 published much-awaited guidance on eligibility for the Sustainable Aviation Fuel tax credit under the Inflation Reduction Act. Treasury announced recognition of the GREET model, to which updates are expected to be made by March 1, to also determine the life cycle GHG emissions rates for SAF.

It remains to be seen if SAF produced with corn ethanol as well as other feedstocks will qualify under the new GREET model, so the ethanol industry has not fully declared a victory in this ongoing development.

"While there are important carbon modeling updates and details that still need to be worked out, we are cautiously optimistic that today's guidance could open the door to an enormous opportunity for America's farmers, ethanol producers and airlines," Renewable Fuels Association President and CEO Geoff Cooper said Dec. 15.

Supply and demand for 2024

According to S&P Global, ethanol production is expected to remain fairly steady in 2023 -- as domestic output is forecast to rise 2,000 b/d from an average of 1.015 million b/d to an average of 1.017 million b/d.

Meanwhile, domestic demand for ethanol is expected to rise from 896,000 b/d in 2023 to 909,000 b/d in 2024, according to S&P Global. Despite the forecast rise in demand for ethanol, gasoline demand in the US is expected to begin to decline in 2024.

As such, policy support from the federal government -- including the allowance of year-round sales of E15 gasoline along with the inclusion of alcohol-to-jet feedstocks in the Inflation Reduction Act's SAF Tax Credit -- will be crucial for the continued growth of the ethanol industry going forward.