China Targets Nationwide Fuel Ethanol, Big Corn Holds Its Breath

20 November 2017

The specter of Chinese agricultural demand once again haunts global markets. Major policy shifts have been touted during the country’s twice-a-decade 2017 Communist Party Congress, many of which directly or indirectly affect agriculture. While some are more fanciful than others, the predominant share of policies move China’s economy farther left toward liberalization, to increasingly resemble the economies of Western countries.

Daily habits increasingly mirror those of the West, too. China is now the world’s largest car market, having surpassed the United States in 2009. As in the US, Chinese citizens are protesting cars’ contribution to smog. In September, China announced an ethanol mandate much like the one in its largest trading partner. Although its eventual effect on emissions is not entirely clear, China’s mandate will also serve to reduce the country’s bloated and rapidly deteriorating corn stocks—by far the largest in the world.

Will nationwide use of ethanol push China to import more corn and build more ethanol processing plants? Or will China simply import more ethanol? Will they import any additional crops at all, or is it a more nuanced story?

Read more:

Background
All for ethanol
Capacity conundrum
Conclusion

Background

Until 2016, the Chinese government bought corn from farmers at a minimum price as part of a decades-long stockpiling program. Enacted to ease food security fears following several post-World War II famines, these price supports have long been inefficient and outdated given China’s newfound wealth.

The costly stockpiling program has left China with substantial reserves of corn. According to government media, China’s corn output stood at around 220 million tonnes in 2016, while stocks amounted to 230 million tonnes. According to the USDA, however, beginning stocks were only 110 million tonnes at the outset of 2016. Regardless, these stocks represent the largest accumulation of corn in the world.

This policy was scrapped in October 2016—one step forward for China toward becoming more market-oriented as reiterated in its “Document 1” this year, the first major policy document released by China’s Ministry of Agriculture in 2017. The country’s corn stocks have tumbled since price support ended, but they are still the largest in the world. The world’s largest corn consumer, the US, maintains a mere 63.2 million tonnes, making China’s stockpiling seem even more excessive. The USDA projects Chinese corn stocks will fall to a five-year low, a still-large 78.7 million tonnes, by the end of 2017.

A portion of this drop may be due to farmers in China’s northeastern corn belt holding onto their crops hoping for a price rise, but it’s likely that farmers will not be able to hold onto their harvests for long because they lack adequate storage.

All for ethanol

To help make use of the excess stock, China announced in September 2017 that bioethanol gasoline will be used nationwide by 2020, specifically E-10—a blend of 10% ethanol in gasoline that is also mandated in the US. According to global ag analysts, the directive will create a noticeable corn supply shortfall in the short term. According to the state-run Xinhua news agency, however, China will not rely on imports to meet demand.

It should be noted that this is not China’s first foray into ethanol mandates. China had tested a corn-to-ethanol policy through pilot programs in 2004 as part of the efforts to cut emissions and advance new energy. In fact, E-10 is already mandated in eleven provinces and forty municipalities nationwide.

China is also the world's third-largest bioethanol producer, producing at least 2 million tonnes a year. Analysts estimate that, given rapidly growing demand for fuel, “nationwide use” of bioethanol gasoline by 2020 will come in between 12 and 15 million tonnes of ethanol annually after implementation.

Capacity conundrum

“The government plan to increase ethanol fuel production was for consuming corn stocks,” Han Jun, director of the central agricultural work leading team office, told official Chinese government media. To meet the 2020 goal, however, China will need to build plants rapidly and import corn or draw down stockpiles. Alternatively, it could just import the ethanol.

Green Plains chief executive Todd Becker said, “Our intelligence says, there’s somewhere in the range of nine operating ethanol plants in China that today are producing about 650,000,000 gallons (1.94 million tonnes)” of the biofuel, although with capacity for 3 million tonnes. On the other end of the spectrum, analysts at S&P Global Platts estimate that China has between 1.1 billion gallons (~3.3 million tonnes) and 2 billion gallons (~6 million tonnes) of ethanol capacity. China will therefore need between 6 and 13 million tonnes of additional ethanol to meet demand by 2020, based on the range of predictions.

A Chinese consulting firm, JC Intelligence, also claimed that more than 10 new ethanol plants will be built in the northeastern cornbelt. Reuters estimates suggest that an ethanol plant of average capacity—about 300,000 tonnes per year—costs about 1 billion yuan ($153 million) to build. Most of those will go on line next year, adding an approximate 3 million tonnes of capacity. China’s remaining demand for imported ethanol would then fall to a range of 3 to 10 million tonnes.

Chinese demand for corn ethanol will be even lower. China has made noticeable efforts to develop more capacity for cellulosic ethanol, an endeavor that more developed countries have struggled with so far. The USDA estimates that only about 75 percent of China’s ethanol is derived from corn, the remainder of which is sourced from a blend of wheat, cassava, sorghum, and corn stover. China has stated its desire to have all ethanol be cellulosic by 2025, but experts are generally unified in their doubt of the potential for that technology. A roughly 75 percent corn ethanol feedstock remains likely by 2020.

Therefore, if they choose to import the ethanol, China’s demand will be closer to the range of 2.25 to 7.5 million tonnes, the mean of which would be 4.81 million tonnes. If they choose to import corn instead, China will need to import between 6.75 and 22.5 million tonnes of corn (using an implied corn-to-ethanol ratio of 3:1).

Import Scenarios Under China's Ethanol Mandate

 

China also hiked import duties of ethanol from 5% to 30% in 2017, further indicating a belief that the country can go it alone. The government said it adjusted the tax to “protect” the domestic industry, and the move stands in deep contrast to prior preferential import tax rates on ethanol purchases from Brazil and the US.

Conclusion

Ultimately China’s attempt to push nationwide E-10 fuel ethanol use by 2020 is an arbitrary goal set by a government agency. If they fail to reach their stated targets, there is a decent chance that nothing happens. China has demonstrated its resolve to liberalize its economy but often as a secondary priority to growth and security. If its corn stocks and urban smog are effectively reduced by the policy, the government is likely to consider it a success regardless of adoption rates.

Assuming China does achieve nationwide E10 use by 2020, the biggest obstacle to understanding how much corn the country will import is the opaque nature of China’s tightly-controlled agricultural system. China has the current ability to produce between 2 and 6 million tonnes of ethanol, according to various predictions from industry analysts. With between 13 and 50 percent of China’s potential ethanol demand already available from domestic production, it will be difficult to make bets on the situation. The intelligence regarding the construction and capacity of new Chinese ethanol plants is even more obscure.

In a more unlikely scenario, China does not achieve its goal yet still enforces its arbitrary standards. The United States will be the main beneficiary if China chooses to import either unprocessed corn or ethanol. The US has a big advantage over Brazil due to the North American country’s stark trade deficit with China. With so many empty backhauls from US ports, corn and ethanol producers will have essentially free transport back across the Pacific. This phenomenon also explains the US shipping unprocessed beans over to China in roughly equal volume to Brazil despite a generally unfavorable bean price differential. Even with the 30% tax, US ethanol could still be competitively priced for China, according to both Green Plains and Archer Daniels Midland executives.

We at Gro believe that, regardless of magnitude and enforcement, China’s mandate will tighten global corn supplies, leading to a more bullish price environment. The impact of the program on global ethanol producers will depend on Chinese implementation decisions. Whether China imports ethanol will likely depend on the pace of growing factory production in the country’s northeast. We recommend paying close attention to developments between Syngenta and ChemChina; if Chinese corn yields improve significantly due to widescale GM adoption, the odds are even slimmer that China will need to import corn. Thus, we recommend using Gro Intelligence to help monitor prices and conditions of China’s coming corn crops.

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