Of corn and giants: a problem in disguise

Valero Energy Corporation (NYSE: VLO) and Archer-Daniels-Midland Co (NYSE: ADM), two of the largest ethanol producers in the U.S., are racing head-to-head in what seems to be a dramatic shift in direction for the U.S. corn exports. A problem in disguise emerges for the U.S. ethanol sector from China’s historic decision to shift its corn imports from the U.S. to Brazil. One might wonder, what does the corn trade with China have to do with it? 

For years, China relied on the U.S. for a great portion of its corn demand – about 60%, while Ukraine pitched in for the rest. However, with the political uncertainty following Russia’s invasion of Ukraine and increased U.S. tensions, China started shopping around for a new provider. And who did they find? Brazil, another member of the BRICS nations, who’s well positioned to take the U.S. title as the leading corn exporter this year.

The question now is, what will happen to all that excess U.S. corn?

Interestingly, the U.S. Department of Agriculture reports that nearly 40% of the total U.S. corn utilization is directed towards ethanol production, both for domestic and export demand. Yet, another intriguing fact is that 80% of the cost to produce ethanol is the corn itself. So, you can see how this shift could potentially have a significant downward impact on U.S. ethanol prices once this surplus of corn gets processed into ethanol instead of being exported. It’s a clear opportunity for U.S. ethanol producers to get their hands on cheaper corn for ethanol production. 

Will cheaper ethanol be a big deal for the renewable energy sector? 

In theory, if ethanol prices go down, this will exert downward pressure on local gasoline prices, given that the U.S. has maintained a 10% ethanol mandate since 2005. This means that oil companies are obligated to blend 10% ethanol with 90% gasoline. In fact, since its implementation, most cars on U.S. roads today can run on blends of up to 10% ethanol (E10). 

Even though the U.S. consumes 20% of the world’s crude oil, it’s also been steadily improving its renewable energy industry. Ethanol’s a big part of that. When gas prices hit a record high in 2022, ethanol producers amped up their game, offering a less costly, greener fuel alternative.

And it’s not just talk – the U.S. economy has felt the benefits. In 2022 alone, by swapping crude oil for locally produced ethanol, the U.S. managed to offset the need for 530 million barrels of imported oil. That’s billions of dollars saved, not to mention the reduction in greenhouse gas emissions and the boost in energy independence.

Can we say that China’s shift is fueling the U.S. to further expand its ethanol industry? Perhaps.

Last year, the ethanol industry added $57 billion to the U.S. GDP, demonstrating its potential to pivot the U.S. into becoming a leading player in the global renewable energy scene. Plus, the U.S. could take a big step forward in its commitment to combat climate change by ramping up its ethanol efforts.

These developments have the potential to reshape the global energy landscape as well as position Valero Energy (NYSE: VLO) and Archer-Daniels-Midland (NYSE: ADM) at the forefront of the global renewable energy race. The increase in U.S. ethanol production and export capacity could exert a significant influence over international crude oil prices as well. In fact, in 2022, the U.S. shipped ethanol to nearly 90 countries, with three markets – Canada, South Korea, and the Netherlands – accounting for more than half of U.S. ethanol exports. If the U.S. is able to maintain its hold on these markets with its less expensive ethanol, it may set a precedent for the world to favour renewable fuels over crude oil.

China’s shift in corn imports has certainly thrown a curveball at U.S. corn farmers and the ethanol industry, but it also comes with an opportunity. By using the corn surplus to boost ethanol production, the U.S. could cut back on crude oil, bring down gas prices, create new jobs in the ethanol sector, stimulate the local economy, and cut greenhouse gas emissions.

Maybe, just maybe, it’s time to start thinking of the U.S. as a potential leader in the field of renewable energy as well as the world’s largest consumer of crude oil.