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Ethanol market is disturbing to American farmers. And now there’s Covid-19.
Keith Dittrich still remembers when the ethanol plant opened outside of Neligh, Nebraska. They called the corn-based gasoline alcohol back in 1980, and according to advertisements, it was “the fuel of the future.” He wanted to believe them.
Just two years before, barely out of high school, he’d jumped in a campervan with a handful of other farmers and followed the “tractorcade” to Washington, D.C., joining thousands of others in the American Agriculture Movement who were demanding “parity not charity.” Expenses were high, commodity prices low, and farmers across the country were fighting foreclosure. Ethanol, Dittrich believed, could help. And more than 20 years later, it did, raising corn prices nearly a dollar per bushel on average.
“What ethanol did was revitalize agriculture,” says Dittrich, past president of the American Corn Growers Association, who farms 4,700 acres of corn and soybeans with his brother in nearby Tilden. “I contend if we would not have gone down the road of ethanol, then agriculture would have been without a new outlet for production that was starting to ramp up.”
Now, roughly 40 percent of the U.S. corn crop is refined into ethanol, but over the last two weeks, Covid-19 has joined a host of other disrupting factors to create what Geoff Cooper, president of the Renewable Fuels Association, calls “not just a perfect storm for ethanol, but a perfect tsunami.” Since the outbreak, ethanol prices have plunged to an all-time low of 88 cents a gallon. Just nine years ago, ethanol peaked at $2.91 a gallon. Facing negative margins, manufacturers have warned of more plant closures and reduced run rates. For Dittrich and thousands of other corn farmers across the country who plant the nation’s No. 1 crop and rely on the ethanol market to sell much of it, the state of the industry is “disturbing as hell.”
“The farmers are nervous as cats because they’re afraid that we’re going to stop buying corn,” says Randy Doyle, CEO of ethanol maker Al-Corn Clean Fuel in Claremont, Minnesota. “And they’re right.”
Today, nearly every gallon of gas sold in the United States contains at least 10-percent ethanol. The Renewable Fuel Standard (RFS), enacted in 2005 as part of the Energy Policy Act and upgraded via the Energy Independence and Security Act of 2007, requires that U.S. transportation fuel contain a minimum volume of renewable fuel. Despite these legislative assurances, the roughly $43 billion industry has lagged considerably since the second half of 2018.
“The question is why?” says Scott Irwin, chair of agricultural marketing at the University of Illinois.
The industry blames the Trump administration’s Environmental Protection Agency. Under the RFS, small refineries can avoid their renewable fuels obligation if they can prove that compliance would cause “disproportionate economic hardship.” Between 2016 and 2018, the EPA granted 85 small-refinery exemptions (SREs), a total of more than four billion ethanol-equivalent gallons of lost demand. Calling it a “bailout bonanza,” the Renewable Fuel Association claims these exemptions have directly resulted in thousands of lost jobs and over a dozen ethanol plant closures. “Rome is burning, while EPA plays Nero’s fiddle,” wrote Geoff Cooper, RFA president, last August.
But Irwin, the ag economist, doesn’t buy it. He says the numbers don’t support the industry’s demand-destruction argument.
“Here’s the fact: before the SREs were started, the aggregate blend rate for ethanol in the United States was approximately 10.1 percent of total motor gasoline consumption in the United States. And today, it’s still about 10.1 percent,” he says. “The industry put in expansion plans starting in 2014-2015,” Irwin explains, because a higher 15 percent blend of ethanol in gasoline had been approved. But even after Trump approved year-round sales in 2018, it was only offered in a small number of service stations. “The bottom line is there was too much supply.”
Less debatable were the impact of retaliatory trade tariffs imposed in 2018 by China, which was once a major importer of U.S. ethanol. Combine all these factors with a global pandemic, which has drastically curtailed travel and therefore demand for gasoline, and an oil price war between Saudia Arabia and Russia, which continues driving the oil supply up and prices down, and the pressure only has mounted. In fact, it may be too much for some ethanol manufacturers— if not the industry itself — to handle, says Doyle of Al-Corn Clean Fuel.
“You’ve got plants that just financially can’t continue to operate. They don’t have the cash to burn, because they haven’t been making any money. The industry has been operating at a break-even to negative level for quite a while. And now you’ve got this real drastic change. It’s pretty ugly. We’ve had some increasingly tough times in the past, but I have never seen anything like this.”
Some manufacturers have begun converting their operations to create alcohol for hand sanitizer, which is currently in low supply in hospitals and nursing homes across the country. But the conversion is hardly seamless. Despite mounting pressure, the FDA has yet to relax the standards for pharmaceutical-grade ethanol, and most fuel-grade facilities “aren’t really designed for this,” said Chad Frieze, general manager of Chippewa Valley Ethanol Company, in a conference call last week.
“The volume you’re going to produce is so small compared to what you were as a fuel producer,” he said, “and the quality spec is so much tighter, most will not be able to make that conversion.”
As demand dwindles, ethanol producers are running out of space to house the excess fuel they make. For example, Al-Corn in Minnesota can store up to five million gallons on site, but it takes just a few weeks at full production to hit capacity. They’re full now, and they have just one last unit train scheduled for pickup this weekend. After that, Doyle says, they’re stuck. No one can take the stuff. Their customers’ tanks are still full from the last shipment.
And the glut doesn’t end with ethanol. According to the latest USDA estimate, 13.4-percent (or 1.89 billion bushels) of last year’s corn harvest is being held at farms or in commercial storage. Many farmers had chosen to keep their crop rather than sell it, holding out for higher prices that failed to materialize.
“And now we’re going to use a lot less of it up. Plus, we’re not exporting any of it. So why even plant corn?” says Bill Armbrust, 62, who farms roughly a thousand acres of corn and soybeans near Elkhorn, Nebraska. “So the pandemic has created an additional problem for us in getting our price of corn to stay up, or go high enough where we could make a living.”
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In light of a fragile ethanol market, Armbrust and other farmers are considering a last-minute shift from corn to soybeans, the country’s second largest crop, for spring planting, but the decision is hardly an easy one. One byproduct of ethanol is distillers grain, which can be used in either a wet or dried form as a high protein livestock feed. With these distillers grains less readily available, many ranchers and livestock operations will pivot, too, presumably, to soybean meal. It’s this presumption, Irwin says, that is “partially supporting soybean prices right now.” On the other hand, if China slips into a recession in the wake of Covid-19, U.S. soybean exports that have remained below pre-trade war levels would take a hit.
Still, “if you factor in that soybeans are a lower input crop, which has a wider planting window, it’s a safer crop to plan on putting in the ground,” Armbrust says.
Ultimately, it’s difficult to distinguish between the effects of Covid-19 and any other number of adverse conditions threatening farming today. Ideally, Armbrust would like to see the government initiate a supply management program, perhaps idling 10-20 percent of America’s cropland, “just to reset everything,” he says. But it doesn’t seem likely. Instead, farmers are stuck fighting tooth and nail to break even by cutting expenses and planting even more.
“Farmers are a little bit like Russia right now with oil. We have to make a certain amount of money to pay for our mortgages and our cost of living and our equipment,” Armbrust says. “So if the price of corn drops to $3.30 a bushel, and we were relying on $3.80 a bushel, our budget suddenly stinks and we have try to produce corn right to the point of no return on investment. So we’re in a bad place.”
Correction: The quote from the Renewable Fuels Association was from Geoff Cooper, RFA president, not Ken Colombini, as first reported.