Your reading list

Chinese ethanol plan could shake up markets

China has announced ambitious plans to require a 10 percent ethanol blend in gasoline by 2020.

This could be as big a factor in crop markets as the huge increase in U.S. ethanol production in the 2000s that helped to lift corn prices for years.

It has the potential to bring massive changes in the global ethanol and corn trade.

China has several motivations for the new policy, including efforts to clean up its polluted skies and to find a use for the 200 million tonnes of corn it has in store, the legacy of a long policy of the government buying grain to support farm incomes. It also has 127 million tonnes of wheat stocks, according to the U.S. Department of Agriculture’s estimate.

There is dispute over just how large China’s corn stocks are, but there is agreement that it is a lot, purchased from local farmers at higher than world prices. The grain will deteriorate over time if nothing is done to increase demand.

China is already the third largest ethanol maker in the world, but to produce enough to meet the 10 percent content target would require massive investment in an additional 36 big plants, each producing about 379 million litres of ethanol a year, according to an estimate produced by Reuters News Agency.

They would require about 45 million tonnes of corn a year. If they used only the surplus government stocks, they’d consume most of the corn in four or five years.

But it seems to me that they would not want to bring stocks down to zero. It would expose them to too much risk if there were a crop failure.

Also, it would be a gargantuan project to design and build 36 ethanol plants and have them operating by 2020, only two and a half years away.

This raises the potential for increased ethanol imports to help fill the gap, at least in the first few years of the program while domestic production ramps up.

If so, that would benefit American and Brazilian ethanol producers and potentially support corn prices.

Also, there is a question whether China’s farmers would produce enough corn to meet the new demand once the stocks are used up.

The government two years ago ended its minimum price support for corn and that resulted in production declines. Seeded area declined in 2016 for the first time in 13 years. The 2017 area was smaller again.

I doubt that Beijing would want to see an increase in corn acres just to produce ethanol. It would go against another policy of trying to conserve and restore soils degraded by over-production.

Also, support for ethanol in China would collapse if making fuel took priority over producing enough food.

To avoid an over-reliance on corn ethanol, Beijing said that by 2025 it would move to large scale production of cellulose-based ethanol and advanced biofuels.

Burning crop residue is a major air pollution problem in China. If it could turn corn stocks and straw from other crops into ethanol it would address the air pollution problem and help to reduce the country’s oil imports.

However, developing a practical system for making cellulose-based ethanol is not easy.

Companies in North America have been trying for years and have spent hundreds of millions of dollars with only modest success.

There are many details to be worked out on China’s ethanol program and likely there will be delays achieving its goals.

But if the policy does shrink China’s massive grain stocks, it would make global supply and demand spreadsheets more realistic.

China’s stocks have been so large they distorted the view of how much grain was in the world.

These mountains of grain were tied up in China, not available on the world market, maybe not even fit for human consumption, and yet they contributed to a perception of global over-supply.

For example, wheat stocks-to-use globally, including China, this year is a burdensome 35.7 percent.

But if you remove China and look only at the rest of the world, the stocks-to-use ratio is a much less problematic 22 percent.

If the ethanol policy brings China’s grain stocks down, it will help give a clearer picture of how much grain is available to world markets.

About the author

Markets at a glance


Stories from our other publications