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Ethanol’s Future? Exports Are Crucial

As the U.S. ethanol industry struggles to regain its strong financial performance of 2013-2014, three new ethanol plants will come online this year and next with a combined annual production of 270 million gallons, adding to the oversupply that’s plagued the industry since 2015.

To reduce the oversupply, the ethanol industry is moving aggressively to boost demand for its product by developing overseas markets of U.S. ethanol. It’s also increasing its market share of the U.S. liquid fuel market by promoting the availability of higher blends of ethanol such as E15, E30, and E85, which contain, respectively, 15%, 30%, and 85% ethanol in a gallon of gas.

When the three new plants begin operations, they’ll be the first new corn ethanol plants to commence production since the 65-million-gallon-a-year Dakota Spirit AgEnergy plant started up in June 2015 in Spiritwood, North Dakota. Before Dakota Spirit went online, it had been five years since a corn-based ethanol plant had started up.

The three plants coming online are as follows.

  • Elite Octane, LLC, which anticipates commencing operations during the third quarter of 2018 as a 120-million-gallon-a-year dry mill ethanol plant in Atlantic, Iowa.
  • Ring-Neck Energy & Feed, LLC, in Onida, South Dakota, which plans to begin producing ethanol late in the fourth quarter or early in the first quarter of 2019.
  • ELEMENT, Inc., a 70-million-gallon-a-year ethanol plant that is under construction in Colwich, Kansas, as a partnership between ICM, Inc., a biofuels process technology provider, and The Andersons, Inc., the Maumee, Ohio, publicly traded agribusiness. 

ELEMENT also will demonstrate ICM’s proprietary technologies for producing cornstarch ethanol as well as cellulosic ethanol.

Since 2014, ethanol production has increased by 10.5% from 14.3 billion gallons to 15.8 billion gallons in 2017. Only one new ethanol plant came online from 2015 to 2018. That means most of the 1.5 billion gallons in increased U.S. ethanol production came from existing plants adopting efficiency improvements to squeeze more ethanol out of each kernel of corn and by expanding existing plants rather than building new ones.

Scott Irwin of the Department of Agricultural and Consumer Economics at the University of Illinois summed up the dilemma facing the U.S. ethanol industry in the March 2018 farmdocdaily publication: 

“Domestic and export use for U.S. ethanol has increased nicely since 2014, but production capacity and actual production increased even faster. The surge in production basically overwhelmed the rise in use, which caused ethanol stocks to increase and ethanol prices and profits to fall. The fortunes of the U.S. ethanol industry are unlikely to improve until production and use are better balanced. Based on recent production and stocks data, it looks like this could take some time.”

The oversupply scenario for U.S. ethanol has been compounded, Irwin said, by the hardship waivers granted recently by the EPA to some petroleum refiners that exempt them from blending requirements contained in the Renewable Fuel Standard.

The EPA told U.S. Senator Charles Grassley (R-IA) that it has granted hardship waivers for refiners that account for 2.25 billion gallons of bio-fuels in 2016 and 2017.

Boosting Domestic Demand

Ethanol producers have unleashed a number of efforts to increase ethanol’s share of the liquid fuel market by promoting higher percentage blends of ethanol in gasoline.

“It’s important that we work to expand our markets through consumer outreach and overcoming barriers to our ethanol exports,” says Lucy Norton, managing director of the Iowa Renewable Fuels Association based in Johnston, Iowa. “We have to continue to look at all avenues for selling E15 and higher blends.”

One of those demand-enhancing efforts is a market development campaign called Prime the Pump that has helped increase the availability of higher blends of ethanol.

Mike O’Brien, vice president of market development at Growth Energy, has been working with Prime the Pump since it was founded in 2014. Since then, the number of gasoline retailers offering higher blends of ethanol has grown rapidly and will hit 1,700 sites by the end of 2018, according to O’Brien.

Prime the Pump offers cost-share grants to gas retailers for installing flexible-fuel gas pumps that can dispense higher blends of ethanol, he says. It also supplies market analysis about consumer behavior that will assist retailers in gaining a competitive advantage when they offer higher ethanol blends. Prime the Pump is currently working with 12 of the top 20 gas retailers in the U.S. 

In addition to efforts by Prime the Pump, several states have programs to help gas retailers purchase flexible-fuel dispensers capable of supplying higher ethanol blends.

Iowa’s Renewable Fuels Infrastructure Program (RFIP) has provided cost-share grants to retailers since 2006 for the installation of equipment that enables them to offer higher blends of ethanol and biodiesel, according to Norton of the Iowa Renewable Fuels Association. 

Since the RFIP program started in 2006, more than $31 million has been awarded for the installation of 336 ethanol blender dispensers, 285 biodiesel dispensers, 11 biodiesel blender pumps, 61 biodiesel storage tanks, and 80 tank wagons in Iowa.

Funding for RFIP was renewed by the Iowa Legislature this year, when it appropriated $3 million for the program for the fiscal year that began July 1. The program is administered by Iowa Department of Agriculture and Land Stewardship.

“Since 2016, the number of retail fuel stations selling E15 has quadrupled in Iowa to 165 stations,” Norton states. “This shows that there is a greater acceptance of retailers in offering E15.”

One of the ways that the Iowa Renewable Fuels Association is promoting the use of E15 is through its Pink at the Pump program, which is cosponsored by Iowa Corn, the organization that promotes the use of corn using the state’s checkoff funds. In 2018, 67 retailers in Iowa, Missouri, and North Dakota will participate in the campaign.

Norton explains that Pink at the Pump broadens consumers’ understanding of E15 as a healthier fuel choice because it reduces cancer-causing products from petroleum-based fuels. The promotion is conducted in October, which is Breast Cancer Awareness Month.

Gas retailers participating in Pink at the Pump donate 3¢ of every gallon of E15 sold in October, Norton says. In 2017, the campaign raised $11,500 for free mammograms, breast cancer support services, and breast cancer research.

For consumers, E15 is the lowest-cost fuel.

POET's Liberty Project

Project-liberty
POET-DSM Advanced Biofuels’ Project LIBERTY cellulosic ethanol plant in Emmetsburg, Iowa, (shown at right) has overcome problems at the pretreatment stage of its production process and is ramping up production, according to Matt Merritt, director of public relations for Sioux Falls, South Dakota-based POET, LLC.

Project LIBERTY is a 50-50 joint venture of POET and Royal DSM, a global science-based company with headquarters in The Netherlands with offices in Elgin, Illinois.

POET is the world’s largest ethanol producer, with a production capacity of 1.9 billion gallons a year. Merritt says POET expects to produce more than 2 billion gallons a year by 2019, when the company’s Marion, Ohio, plant finishes its expansion from 70 million gallons a year to 150 million gallons annually.

Merritt says the main impediment to commercializing cellulosic biofuels has always been the pretreatment stage. POET cleared those pretreatment hurdles in 2017, he states. “Now we’re working on some things such as the co-product line, and we are ramping up production,” Merritt says.

In full production, the plant will produce 20 million gallons of cellulosic ethanol from corn stover. “We’ve been shipping cellulosic ethanol from the plant for some time, so we’re contributing cellulosic gallons to the biofuel supply,” he says.

The plant is currently working through the supply of corn stover that it built up through contracts with area farmers. “The plant has been contracting with farmers since before we built the plant to make sure we had a process that was comfortable for them,” Merritt says. “Farmers have been very patient with us as we worked on the plant. They continue to be excited to be part of a revolutionary value-added agriculture.”

Two other large cellulosic ethanol plants, started in 2014, were not operating at the time of the publication of this article.

Exports Drive Ethanol Growth

From his landlocked office near St. Paul, Minnesota, Max Thomasson tracks ethanol tankers headed to distant seaports for CHS Inc. Thomasson, who came to CHS from the oil company, BP, is director of global international trade for renewable fuels. His division of CHS markets for two ethanol plants owned by CHS and eight others, a group with combined yearly production of 1 billion gallons.

They’re benefitting from U.S. ethanol exports that hit a record of almost 1.4 billion gallons last year.

“Exports so far this year have been very impressive,” says Thomasson. The Commerce Department reports a monthly record in February and strong sales last spring. All this has happened in spite of Brazil putting a quota and duties on U.S. imports and China shutting off U.S. sales with tariffs. If China reenters the market for ethanol, Thomasson sees another record year ahead, with a boost of 200 million to 300 million gallons possible. 

Exports are both an escape valve for overcapacity among U.S. ethanol plants and the best way to grow overall demand. They may even offset shrinking gasoline usage in this country as cars grow more efficient and consumers turn to electric vehicles.

Last year, the U.S. burned more than 14 billion gallons of fuel ethanol. Exports have the potential to use another 4 billion gallons mostly from the U.S., says Jim Miller, a former USDA undersecretary whose Phoenix, Arizona, consulting business works with Growth Energy.  Most of that could be sold to six nations: Brazil, Canada, India (the top three U.S. customers last year), China, Mexico, and Japan. 

“China, India, and Mexico are kind of the wild cards there,” he says. All three have goals of blending 10% ethanol (E10) in a few years. India remains protectionist, and China and Mexico are caught up in trade disputes with the U.S. 

Miller also sees potential for more exports to Colombia, Peru, the Philippines, South Korea, Vietnam, and the European Union. The EU was a large market that’s now limited by tariffs.

“To expect that to evolve quickly over the next couple of years is probably a stretch,” Miller adds.

Instead, Growth Energy and the Renewable Fuels Association work with the U.S. Grains Council (USGC) to give technical support to nations that want to increase ethanol use. 

This is more sophisticated than attacking trade barriers. 

“Our overarching goal is to grow the global use of ethanol,” says Brian Healy, manager of export ethanol market development for USGC. His group works with USDA’s Foreign Agricultural Service to show countries unable to make their own ethanol that it benefits the environment, human health, and the economy. It also works with countries that can make ethanol. 

“As they implement goals of E10 or greater, it does take some time for domestic production to catch up,” Healy says. That’s when the U.S. steps in.

At CHS, Thomasson sees four drivers of demand for U.S. ethanol exports:

  1. More mandates to blend ethanol into gasoline. China aims for nationwide E10 sales by 2020. Some nations are shooting higher. The Philippines has a goal of E20 by the same year. Healy adds that blending is driven, in part, by a desire to lower greenhouse gas emissions under the Paris climate accord.
  2. Ethanol is the cheapest octane source for fuel. Last summer it was running 10¢ to 15¢ per gallon less than MTBE, an octane now banned in the U.S., and 20¢ to 25¢ under BTX (a mixture of benzene, toluene and xylene) Both streams are non-ethanol sources of octane.
  3. Environmental benefits and energy independence. Eliminating MTBE helps with both for some countries. India, for example, produces no oil but has large refineries. Miller says his group is trying to show potential costs savings for those refineries by using ethanol. And ethanol can play a role in reducing air pollution in large cities in India, where seasonal burning of rice straw nearby creates smog that rivals the worst in China. Until now, India has relied only on domestic ethanol made from cane molasses. The government recently approved using domestic corn ethanol, which U.S. exporters see as a hopeful sign that American ethanol may one day fill in some supply gaps.
  4. Growing populations and a growing middle class. Gasoline demand is growing at about 10% a year in both China and India, a rate that was typical in the U.S. in the 1960s and ’70s, says Healy.

Adds Thomasson, “More gasoline and energy demand means more ethanol demand.” 

2017-ethanol-exports

Where is Ethanol Headed? Watch Three Trends

  1. Delays in starting year-round E15 sales. President Donald Trump has said he supports it. Yet, in order to open new markets to E15 by next summer’s driving season, the EPA needs to end vapor pressure restrictions on higher ethanol blends. It takes months to finalize such new rules.  
  2. Continued ethanol export growth. A new record is expected for 2018, even after trade disputes froze sales to China. Mexico and Canada – two strong markets – are at risk if NAFTA talks go poorly.
  3. Regaining ethanol demand destroyed by former EPA Administrator Scott Pruitt. That fight could languish in courts and bureaucracy for months. Ethanol groups have sued the EPA and petitioned the agency to reallocate ethanol volume lost when Pruitt gave oil refiners hardship waivers to stop blending ethanol.  

Year-round E15 helps a lot. Emily Skor, CEO of Growth Energy, says independent gas retailers have plans to sell more E15 after approval. “You’re looking at a potential 1.3 billion gallons of demand over five years,” she says. “These are real numbers. There’s a lot of opportunity.”

Exports remain crucial. Renewable Fuels Association CEO Geoff Cooper expects up to 1.7 billion gallons in U.S. ethanol exports this year, above last year’s record of 1.37 billion. 

“Exports have been a godsend to the industry because we are seeing softer demand domestically due to the small refinery waivers,” he says. It almost offsets a drop in domestic use, from 14.4 billion gallons last year to 14 billion gallons in 2018.

Canada is our second-biggest ethanol export market. “It’s an incredibly important country,” says Brian Jennings, CEO of the American Coalition for Ethanol. “That means NAFTA renegotiations are critical for us.”

Another export threat: In exchange for year-round E15, oil companies may want exports counted with domestic ethanol trading. Monte Shaw, executive director of the Iowa Renewable Fuels Association, says other countries call that an illegal export subsidy. “It’s the worst of a lot of bad ideas,” he says.

us-ethanol-exports

An estimated 8.7% of total U.S. ethanol production was exported in 2017. One out of every 11 gallons produced was exported. That’s the highest share in history, barely edging out 2011. Another record is likely in 2018. Chart Source: Renewable Fuels Association

Experts Disagree On Ethanol Demand Limits

University of Illinois agricultural economist Scott Irwin is bearish on the long-term demand for ethanol due to the efficiency of plug-in electric vehicles.

“To me, the handwriting is on the wall that we’re going to convert to electric vehicles,” he says.

“There are major obstacles, too,” he says.  “We do not have the electrical generating capacity, batteries are not there yet. There are range limitations and charging limitations.”  At the same time, Irwin sees auto manufacturers moving toward e-vehicles, devoting more research to them and some promise to sell only electric cars in the future.

“There’s no way this happens in five years,” Irwin says. “It strikes me as we’re looking at a 15- to 20-year transition.”

Meanwhile, a study by the Fuels Institute projects battery electric and plug in hybrids with about 8% of market share of light duty vehicles by 2025 and only a slight effect on fuel demand. Ron Lamberty is senior vice president of the American Coalition for Ethanol, a group that belongs to the Fuels Institute. Lamberty remains optimistic about demand for ethanol, in part because of rapid growth of sales of conventional cars in developing nations. Americans own about 250 million cars, but global ownership will hit 2 billion soon, he says.

“If you look at a world view, there’s a lot more gas cars than there were even just five years ago,” he says.

Irwin agrees that e-vehicle demand in developing nations will grow more slowly, partly because they may not be able to increase electricity generation as fast as in the U.S. and other developed countries.

At Iowa State University, ag economist Chad Hart sees a future with a mix of vehicle types. “It’s not a silver bullet but a menu approach,” he says.

Few doubt, though, that demand for liquid fuels will shrink as conventional cars become more efficient. The Energy Information Administration’s latest projection is: “Increases in fuel economy standards temper growth in motor gasoline consumption, which decreases by 31% between 2017 and 2050.”

value-ethanol-exports

U.S. ethanol exports were valued at $2.4 billion in 2017, up 16% from 2016 and the second-highest on record. Ethanol is the cheapest octane source for fuel, an important factor in its global demand. Chart Source: Renewable Fuels Association

Written by Jerry Perkins and Dan Looker. Perkins has covered farm and agribusiness news, both domestically and internationally, for more than 40 years. He was the farm editor of the Des Moines Register from 1993 to 2008 and editor of BioFuels Journal, a quarterly magazine that covered the ethanol and advanced biofuels industries, from 2009 to March 2018. Looker served for 23 years as Farm Business Editor for Successful Farming magazine and Agriculture.com. He covered farm business and policy issues.

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