Recently, China announced that the nation will have its own version of a bio-ethanol standard in the country by 2020.
The plan is viewed by many as a way for the country to address its punishing smog and air pollution that has plagued cities due to heavy traffic and high concentrations of people.
“The plan was unveiled as the country is pushing the use of biofuel, which is renewable, applicable, environmental-friendly, and tech-savvy. It is an ideal alternative to fossil fuel,” the Chinese government said, according to Xinhua news agency.
In reality, this is a solution to another problem: China’s massive corn stocks.
Over the last month, the nation has been selling off old corn in an effort to clear out its storage capacity.
What better way to ensure that corn disappears than to mandate a law that consumers need to buy it and burn it as ethanol.
Immediately, we heard analysts project that this would be a game-changing event for corn producers. The country is the largest automobile market, third-largest consumer of ethanol, and world’s second largest producer of corn.
But for all of the chatter, this isn’t likely to boost U.S. corn exports higher in the near future.
We’re ranking the Chinese ethanol mandate as little more than “Noise” in the corn market.
Just How Much Can Production Expand?
Digging into the data, it appears that if China’s goals are so ambitious that they are nearly unobtainable.
According to S&P Global Platted, the country currently has the capacity to produce about 1 billion gallons of ethanol. Analyst Peter Meyer argues that the nation would need to increase this production by at least a factor of 10 in order to fulfill its E-10 mandate.
According to data from the National Bureau of Statistics, China will have to produce an extra 12 million tonnes of ethanol, a figure that requires about 36 million tonnes of corn. Even at current capacity, the country would only see about a 30% to 35% gain in production and fall well short of its target.
With fewer than three years to implement this sort of law, the only logical explanation is that the country is going to import a significant amount of ethanol from other countries (hint, hint: The United States).
That pins 2019 as the year that ethanol imports would logically increase.
First, the country might have enough in storage right now.
Estimates range between 80 million tonnes and 250 million tonnes, depending on whom you ask. These figures suggest that China has enough corn in stock to produce two to six years of ethanol in the coming years.
Simply put, you’re looking at a few years before the supply-demand equation is balanced in the country.
Then there’s the issue of Chinese production, which will ramp up in the years ahead.
There is not a lot of data about the impact of domestic corn production in the wake of an ethanol standard. Let’s take a look at the U.S. in the wake of the ethanol standard in the Energy Independence and Security Act of 2007.
Back in 2007, corn prices doubled in part to the ethanol mandate. Expectations called for ethanol to consume about 26% of the crop back then, up from 11% in 2004.
Credit Suisse projected that ethanol consumption would eat about 36% — yes 36% — of the crop by 2008.
But times were different then. The paper markets were in the process of succumbing to excessive speculation, manifesting in significantly higher prices that ultimately burst. Fortune at the time warned of a “dot-corn” bubble.
U.S. production in 2006 came in at 10.5 billion bushels thanks to the drought. The following year, the number increased to 13.0 billion bushels. In the wake of the ethanol mandate, U.S production didn’t magically soar overnight.
Production came in around 12.0 billion bushels in 2008. However, we’ve seen domestic production and acreage remain above 12.0 billion bushels in every year since (aside from the 2012 drought year). Domestic production has topped 13.6 billion every year since 2013.
So, how much corn did the U.S. import to satisfy its ethanol needs?
The answer is zero.
From 2006 to 2007, corn acres in America jumped from a little more than 78 million to 93.5 million! In the past decade since the ethanol mandate became law, planted corn acres in the US have not been below 86 million acres.
In fact, 6 out of the past 10 years has American corn acres sit above 90 million acres.
This is why we’re extremely skeptical of a lot of US or even South American corn making it to China. It might be a million tonnes or two but that’s not significant enough to move the needle for us.
Why China will be able to satisfy most of its own demand is a rebound in acres and an improvement in corn hybrids being used.
You have to acknowledge that ChemChina’s purchase of Syngenta is looking pretty smart right now. Better yields in the People’s Republic, combined with expanded acreage is seemingly inevitable.
Finally, it’s key to remember that this standard doesn’t go into place until 2020, analysts need to consider this question: Wouldn’t China just buy ethanol from the United States or other countries instead of buying foreign corn (the purpose of the ethanol plan is to reduce reserves, not build them up with imports).