OMAHA (DTN) -- At least two of Valero's 14 ethanol plants may be temporarily halting production, citing excess ethanol in storage as gasoline demand is falling amid the COVID-19 outbreak.
In letters sent to traders this week, the company said it was unable to fulfill contracts with traders who sell dried distillers grains for its plants in Albion, Nebraska, and Albert City, Iowa. In addition, Valero has notified corn purchasers for its Lakota, Iowa, ethanol plant that it is not buying corn.
Valero cited the pandemic as a force majeure event in making the decisions.
Force majeure is a clause included in contracts to remove liability for natural and unavoidable catastrophes that interrupt the expected course of events. In this case, Valero isn't required to fulfill its contract obligations.
Valero did not respond to DTN's request for comment and additional information.
Gasoline demand has been falling, meaning ethanol demand has slowed. Consequently, ethanol plants are running out of ethanol storage capacity. Ethanol futures prices has nosedived during the past five weeks, from $1.36 a gallon on Feb. 18, to 90.8 cents on March 25.
Wednesday's Energy Information Administration data showed domestic ethanol production dropped for a third straight week, sliding 3% to a 23-week low in the week ended March 20, while blending demand dropped to the lowest level in six weeks, and inventories were drawn down. EIA showed U.S. ethanol supply was down 458,000 barrels (bbl) from last week to 24.140 million bbl, a seven-week low and down 1.2% from the same week last year, DTN Cash Grains Analyst Mary Kennedy noted Wednesday.
Valero is one of the largest ethanol producers in the United States with an annual capacity of about 1.73 billion gallons.
This week the company sent out letters to contracted sellers of DDGs at the Albion and Albert City plants, indicating it was stopping production.
According to a copy of the DDGs letter obtained by DTN, Valero Marketing and Supply Company said it was "not able to perform" on its end of contracts.
"COVID-19 is a force majeure event that has arisen because gasoline demand has diminished worldwide due to the COVID-19 pandemic, which has reduced the demand for corn ethanol globally," the letter states.
"As a result of both the excess ethanol in the market as well as the need for excess gasoline storage, storage tank availability in the United States for corn ethanol use has severely declined. Given the physical restraints in its ability to move or store corn ethanol, VRF is temporarily closing its plants until such time as the pandemic has receded."
Valero employs more than 900 people at its plants in Albert City, Charles City, Fort Dodge, Hartley, and Lakota in Iowa; Albion, Nebraska; Aurora, South Dakota; Bluffton, Linden and Mount Vernon in Indiana; Bloomingburg, Ohio; Johnson Creek, Wisconsin; Riga, Michigan; and Welcome, Minnesota.
The plants use about 606 million bushels of corn and produce about 4.6 million tons of DDGs annually.
Brian Milne, editor and product manager for DTN Energy, said he expects ethanol plants across the country to continue dialing back production "sharply" in response to the drop in gasoline demand.
"My take is Valero is heavily exposed in the downturn and is looking to quickly cut their losses," he said.
"They are a sophisticated refiner as well as ethanol producer, so might hold a view that we're now embarking upon longer lasting weakness in gasoline demand."
Milne said energy markets across the country is oversupplied.
"We have too much crude oil, gasoline and ethanol, and diesel, jet fuel and natural gas," he said.
"There's a lot of talk about oil producer bankruptcies. Think we see an oil refinery or two shuttered, and multiple ethanol plants mothballed if our current situation endures."
Todd Neeley can be reached at email@example.com
Follow him on Twitter @toddneeleyDTN
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