The Chinese Ethanol Program Will Burn Through Its Corn Stocks

19 September 2017

Last week, the Chinese government announced the expansion of their ethanol program by requiring the use of E10 (a gasoline blend with 10% ethanol) in all vehicles nationwide by 2020. The move comes as the government struggles to simultaneously deal with the problem of excess corn reserves and growing environmental issues. We encourage you to explore the data used in this post within our interactive displays.

Last week, the Chinese government announced the expansion of their ethanol program by requiring the use of E10 (a gasoline blend with 10% ethanol) in all vehicles nationwide by 2020. The move comes as the government struggles to simultaneously deal with the problem of excess corn reserves and growing environmental issues. We encourage you to explore the data used in this post within our interactive displays.

History of Chinese Ethanol

The Chinese mainly produce ethanol from corn. E10 mandates in China began in 2002 and currently exist in 11 provinces: Heilongjiang, Jilin, Liaoning, Henan, Anhui, Shandong, Zhejiang, Guangzhou, Guangxi, Jiangsu, and Hainan. Originally designed to help China get rid of its stale corn stockpile in the early 2000s, the program was temporarily scaled back in 2008 due to rising global grain prices and the realization that fresh corn harvests were being used for ethanol production at the expense of animal feed. At present, E10 accounts for approximately 20% of China’s gasoline consumption.

China ended almost a decade of price supports for corn in March 2016. The policy left the country with the world’s largest inventory of corn. Opinions differ on the exact amount that the Chinese government currently has in reserve, but figures range from the USDA’s estimate of 81 million tonnes up to 250 million tonnes elsewhere.

Does China Have Enough Corn?

Chinese demand will spike as a result of the ethanol mandate. Corn used for ethanol in the US is now more than four times the amount used in 2005, before the Renewable Fuel Standard was enacted. Nationwide, China currently uses approximately 170 billion liters of gasoline per year. Using a conservative assumption that gasoline use in China will not increase from present levels, China will require about 17 billion liters of ethanol annually after the implementation of this mandate. Approximately 40 million tonnes of corn is required to produce this amount of ethanol per year. Depending on the size of China’s current stockpile, the Chinese have enough corn to meet ethanol demand for two to a little more than six years.

 

Given the declining rate at which China is accumulating corn, it is likely that the government will one day find itself in the same position that it did in 2008, when fuel was battling food for access to fresh corn. Unlike the United States in 2005, it is doubtful that China has the ability to expand much further beyond its current corn production level. US corn yields are currently approximately 70% higher than Chinese yields. However, research has shown that due to land and water limits, China’s yields are unlikely to grow to US levels. The latest China Agricultural Supply/Demand Estimate (CASDE) report in Gro calls for a national yield of 6.0 tonnes/hectare which compares very poorly with Gro’s 10.8 tonnes/hectare forecast for the US.

 

Furthermore, Chinese farmers have already begun to switch away from planting corn to other grains, such as wheat and rice, and China’s most imported agricultural crop, soybeans. The government’s mandate could incentivize farmers to switch back to corn should domestic prices rise again, but this seems unlikely given the tough competition that corn exports from the United States and Brazil will no doubt provide.

Effect on Global Supply and Demand Balances

The Chinese ethanol expansion announcement comes at an opportune time for corn producers. Recent surpluses of corn have prompted some US farmers to switch to planting soy instead. While the season started off below trend due to weather, Gro’s yield model (and the USDA) recently predicted another large US corn harvest for 2017, which pushed down corn prices. Given that the US is currently the world’s largest corn exporter and the largest exporter of ethanol to China, the Chinese government’s mandate was welcome news for US corn producers.

As we’ve seen in recent years with soybeans, Chinese appetite is large enough to cause major shifts in world markets. We at Gro predict that the Chinese government’s new ethanol policy will cause a significant increase in global demand for corn. US corn exporters can expect more import demand from China in the years to come.

 

Interact with the data on Chinese ethanol from this post on Gro

Explore more US ethanol data on Gro

Contact sales