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Corn-Based Ethanol Plants Diversify to Survive

Relying on exports is a risky strategy, one ethanol operator says.

Despite the dismal economics that have plagued the U.S. ethanol industry for the past year-and-a-half, some plants are staying the course by diversifying their revenue streams and bolstering their bottom lines by increasing their production of higher value co-products, making cellulosic ethanol they can sell for a premium, and cutting costs to be more efficient.

The extra measures being taken by these ethanol plants have let them maintain production at or near capacity while other plants have shut down or cut back severely on production.

SRE Waivers Hurt

Ethanol margins have been hurt, in part, by a decrease in demand brought about by small refinery exemptions (SREs) granted by the Trump administration, ethanol industry leaders have said. Since taking office, the Trump administration has granted SREs to 85 oil refineries that have resulted in a loss of 4 billion gallons of renewable fuels that would otherwise have been blended into the nation’s fuel supply.

At the same time, tariffs imposed because of trade wars, a strong U.S. dollar, and a slowing world economy have cut U.S. ethanol exports to all destinations by 19% in the first six months of 2019 compared with the same six months a year ago. According to the U.S. Energy Information Administration (EIA), U.S. ethanol exports totaled 18.1 million barrels (760.2  million gallons) in the first six months of 2019, a decrease of 4.2 million barrels (176.4 million gallons) from the same period a year ago.

In reaction to their depressed financial results, U.S. ethanol producers have cut their production to the lowest level since April. Meanwhile, ethanol stocks have continued to rise. Delayne Johnson, CEO of Quad County Corn Processors in Galva, Iowa, says one bright spot for his ethanol plant in northwest Iowa is that the area’s corn crop looks to be very good this year.

Johnson says Quad County has, for the past 30 days, been running at 80% capacity while it waits for the new crop corn to come in. It produces 35 million gallons a year of conventional ethanol, plus an additional 2 million gallons annually of cellulosic ethanol from its kernel fiber technology (KFT) that it developed five years ago.

Johnson notes that two ethanol plants in northwest Iowa have shut down and others are running at 50% to 70% of capacity while they wait for the 2019 corn harvest to begin.

Technology Counters Low Demand

Meanwhile, ethanol plants are waiting for demand to pick up. “Supply and demand have to be balanced,” Johnson states. “In the past, we’ve had exports or an increase in domestic demand” to keep supplies in line. However, he adds, with the U.S.-China trade war, export sales have been hurt, and the SREs issued by the Environmental Protection Agency have cut domestic ethanol demand.  “We’re hopeful that the tariffs will go away and the SREs, too,” he adds.

Producers in the ethanol industry who have instituted a diversified income strategy are getting better income streams, he says.

Quad County added KFT to produce high protein feed, additional distiller's corn oil, and cellulosic ethanol from the corn kernel fiber contained in the corn it purchases, Johnson says. The plant is currently licensing the technology to the ethanol industry as a way for each plant to get more value out of each kernel of corn they process.

“We’re looking to license the technology to other plants,” Johnson says. “It’s had a positive (financial) impact on us.”

KFT can add to an ethanol plant’s income by increasing its distiller's corn oil yield, raising the value of its distillers’ grains by increasing protein content and digestibility for livestock, and by adding gallons of ethanol production from the same amount of corn. Because cellulosic ethanol earns a higher price for its renewable identification numbers (D3 RINs), the cellulosic corn fiber ethanol from KFT adds a fourth income stream, Johnson notes. Cellulosic ethanol was earning a $2 premium over conventional corn-based ethanol RINs, he says, until the SREs drove the RIN market down.

Johnson said Quad County is looking at some other diversification ideas to add value to the corn it purchases by producing biochemicals and additional protein enhancements as value streams connected to KFT.

“Ultimately,” he says, “in the long term, our industry needs to sell 100% ethanol directly to the consumer. Consumers are only given the choice at the pump that oil companies want to give them. Ethanol is 50¢ a gallon cheaper than gasoline, and it is made here in the United States.” Recent disruptions in the supply of oil from Saudi Arabia have proven again that domestic production of U.S. renewable fuels enhances national energy security, he adds.

Higher Protein DDGs

Steve Roe, general manager of Little Sioux Corn Processors, LLLP in Marcus, Iowa, says that, unlike other plants in northwest Iowa, the plant is currently running at its full capacity of 155 million gallons a year. “We’re trying to figure out ways to go faster,” he notes.

 “Although we haven’t been setting the world on fire, at least we are not going backward,” Roe says. “We’ve been able to cash flow through all of this downturn. We’re going to have some small profits this year unless things get worse.”

The directors of Little Sioux Corn Processors are considering adding more diversity to the plant’s revenue stream by adding Fluid Quip Process Technologies (FQPT) equipment that will produce a higher-protein distillers’ grains product that can be marketed to cattle feeders and provide other efficiencies and high-value products.

“We have a large number of cattle here in northwest Iowa,” Roe comments. “We can sell the high-protein feed into that local market or into the export market. It’s a way to gross more revenue and diversify our revenue stream so we aren’t just relying on distillers’ grains or on ethanol. We’re trying to stay one step ahead of the industry.”

Relying on exports is a risky strategy, Roe says. “The export market will always be up and down. Exports are down this year and were up last year. We could be up again next year.”

As for boosting ethanol demand by selling higher blends of ethanol in gasoline, Roe said that option is not looking very promising with the SREs cutting demand. “Unless we get the SREs cut back and reallocate the gallons that we’ve lost because of them, ethanol demand is not going to pick up,” Roe states.

Efficiency, Efficiency, Efficiency

Ringneck Energy of Onida, South Dakota, the newest ethanol plant in the United States, is still producing at or near its capacity of 80 million gallons a year since it started production in May, according to Walt Wendland, chairman, president, and CEO of the plant.

Because the plant is new, he says, it has a lot of the latest efficiencies built in. “Like a lot of plants, we’re trying to be as efficient as possible,” Wendland says. “We sure haven’t talked about cutting production or shutting down.“

Selling higher blends of ethanol in gasoline can help the industry by increasing the market for ethanol, Wendland noted. “I think more and more E15 pumps can be installed, so that’s got to help,” he says. “Our industry is getting the word out that ethanol is good for the environment. Also, our soldiers don’t have to protect our ethanol plants. We are letting consumers know that we can’t frack our way out of this.”

Exports are another way to overcome the domestic demand slump, he states. “We are the lowest cost producer of ethanol in the world, so we should be very competitive on the export market. We’re holding out hope for exports to Mexico.”

The Mexican government has recently approved the use of a 10% blend of ethanol with gasoline (E10) with the exception of Mexico City, Guadalajara, and Monterrey. “That’s an easy market for us to get to and they import a large percentage of their gasoline from the U.S. already,” Wendland states. “Canada has been a great customer of U.S. ethanol for years, but Mexico has the ability to consume more ethanol than Canada does.”

Rick Schwarck, chairman, president, and CEO of Absolute Energy in St. Ansgar, Iowa, says the plant is currently shut down for routine maintenance as it does every spring and fall. Before the semi-annual shutdown for maintenance, the plant was operating at its full capacity of 130 million gallons a year.

“We expect to keep running at full production,” Schwarck says. “I’m cautiously optimistic about the ethanol industry’s future.  A lot of what takes place in the next two weeks (with SREs) will set the course for the next two years."

Brian Kletscher, CEO and General Manager of Highwater Ethanol LLC in Lamberton, MN, said a lot of ethanol plants continue to work on becoming more efficient by using better strains of yeast and enzymes in the ethanol process while some are producing high-protein feed or improving their corn oil yield.

“That’s what makes the ethanol industry so resilient: We continue to work on our efficiencies so we can maintain our cash flow. We’re always looking at improving our margins,” Kletscher said.

At Highwater Ethanol, Kletscher said the plant is grinding its corn finer, which makes the starch in the kernel more available for processing and increases ethanol production.

Highwater Ethanol started production in August 2009 as a 55-million-gallon-a-year plant. By increasing its efficiencies, its been able to push its annual capacity to 59.5 million gallons, Kletscher noted. “We cut production back in March by 12% because of the poor margins,” he said, “but we’ve been operating at 100% of capacity since April. We’ve been through tough times before, like in 2012, so we know what it takes to ride out these tough times and this is as bad or worse than 2012.”

Highwater has looked at other ways to save energy and money but it has decided not to adopt the new technologies. “We’re waiting on our margins to come back so we can pay for the projects out of revenues,” Kletscher stated. “We don’t like to borrow money to pay for those projects.”

Kletscher told Successful Farming that he foresees the U.S. ethanol industry returning to profitable conditions. “This is a commodity driven industry and we need to make sure our exports are building,” he said. 

The attack on the Saudi Arabian oil fields should serve as a wakeup call that U.S. ethanol plants produce a renewable fuel that replaces foreign oil.

Environmentally Friendly

Another selling point is that ethanol also has environmental benefits. “I think we’ll see a need for ethanol to help cities clean their air, both here and in other countries,” Kletscher stated. “Other countries are turning to ethanol blends to clean up their air and there’ll be great opportunities there.”

U.S. corn growers have a tremendous ability to raise an abundant crop, he added, and that corn can be used for exports, as livestock feed, and to produce ethanol. All those avenues are needed to keep U.S. agriculture productive and profitable.

Ethanol is an important part of the U.S. energy picture, Kletscher added, but other forms of energy also are needed.  “We need all the forms of energy to power the United States,” Kletscher stated. “One sector can’t carry it all and we need to find a way to keep all forms of energy price competitive. The ethanol industry is strong and resilient. You hear about slowdowns or shutdowns of ethanol plants, but when the ethanol is needed, we are going to be there to produce it.”
Lyle Schlyer, president of Calgren Renewable Fuels, said the company has adopted two technologies—co-generation of power at its Pratt, KS and Pixley, CA plants and biogas generation at the California plant.

The Pratt, KS plant produces 55 million gallons of ethanol at full capacity and the Pixley, CA plant produces slightly more at 57 million gallons a year. Both are now running at full capacity, Schlyer said.

“In Kansas and California, we generate our own electricity with co-generation units,” Schlyer noted. In Kansas, the plant uses natural gas. In California, the Pixley plant can use natural gas or biogas produced by digesting dairy cattle manure.

The co-generation of power lowers the Kansas plant’s carbon intensity, Schlyer said, because it means the plant doesn’t use electricity from the grid, much of which is derived from coal, a fossil fuel with a high carbon score.

In California, Calgren is doing a couple of things to lower the plant’s carbon score and save money. “We are starting a biodiesel plant that we believe will be more efficient when converting waste products into biodiesel,” Schlyer said. The biodiesel plant is co-located with the ethanol plant so the two plants can share the energy from the two co-generation units at the Pixley location. Half of the biodiesel is produced from corn oil extracted by the ethanol production process. The other half of the biodiesel is produced from used cooking oil and fats from animal rendering plants.

The biodiesel plant has just started production, Schlyer said. When it is running at full capacity, it will produce 5.5 million gallons of biodiesel a year.

Several years ago, the California ethanol plant installed a bio-digester that produces biogas from the manure of a large neighboring dairy. The biogas is used as a substitute for natural gas.

Subsequently, Calgren has teamed up with other dairy producers that are as far as six miles from the ethanol plant. “Now, we are putting together a dairy digester cluster project,” Schlyer said, The original plan called for the utilization of 11 dairy digesters. However, more dairies have joined the project and the total number of covered lagoon digesters could grow to as many as 25, he noted.

A pipeline is being built to connect the different digesters, Schlyer stated. 

Some of the biogas will be used to power the ethanol and biodiesel plants, he said, and the rest will be sold to compressed natural gas companies for transportation fuel and other uses.

“These are high return-on-investment projects,” Schlyer commented. “We’ll be opportunistic and flexible and I’m comfortable that it’s a good deal for us.”

Schlyer declined to be more specific about the financial returns of the biogas and biodiesel projects. However, the two projects are part of a larger vision involving renewable fuels. “We see our ethanol plants as building blocks for producing other renewable fuels,” Schlyer stated. “We see an ethanol plant as part of a renewable fuel complex. We were able to do both the biodiesel plant and biogas projects because we have an ethanol plant. That ethanol plant gave us a pretty cool way to make low-carbon fuel and market low-carbon fuel here in California In our case, the projects happen to be working out pretty well.””

Ethanol Outlook

Looking five years and beyond, Schwarck says he’s still optimistic because ethanol is a low-carbon, high-octane fuel that will have a strong future. “Both higher blends of ethanol and export sales will lead the way,” he says. “Ethanol is a clean-burning, American-made renewable fuel.”

The attacks on the Saudi Arabian oil fields have driven home the point that ethanol provides a reliable supply of U.S.-based fuel, he adds.

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