U.S. ethanol future tied to bumper crop of D.C. politics

Politics is playing a significant role in the future of ethanol, which now uses more than 30 per cent of the corn in the U.S.

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Glacier FarmMedia staff – Ethanol producers in the United States achieved another record year in 2018, with production climbing 1.9 per cent to 16.1 billion U.S. gallons processed from about 5.6 billion bushels of corn, or about 38 per cent of the 2017-18 crop.

But ethanol producers are not content. They are vexed by the actions of the U.S. Environmental Protection Agency, which oversees the Renewable Fuel Standard. That standard has a dominating effect on the amount of ethanol used in the United States.

Things are coming to a head this winter and the results will have major implications for the future state of the ethanol industry.

That state in 2018 was decidedly depressed as U.S. ethanol prices hit 13-year lows, threatening the financial viability of biofuel producers and causing some plants to slow production.

Why should Canadian farmers care about U.S. ethanol? Because it is the largest single source of demand for U.S. corn. It is bigger than the domestic feed corn market and more than twice as large as the amount of corn exported. If that demand was not there, corn prices would be much lower and that would weaken the price of all other crops, including those grown in Canada.

So although we have no control over U.S. politicians or the EPA, their actions affect the grain market in which Canadian farmers operate.

The EPA is caught between two powerful interest groups — ethanol/corn producers and the oil industry.

The current RFS is E10, meaning gasoline has a 10 per cent ethanol blend, but the industry can now easily meet that and wants the standard raised to year-round E15.

But oil processors say the requirement to blend ethanol with gasoline creates big costs that threaten the viability of smaller refineries.

Each side of the debate has its backers in the House of Representatives and in the Senate.

Last fall, President Donald Trump directed the EPA to alter its regulations to allow E15 use year-round nation-wide. That directive is supposed to be ready for this summer’s driving season.

But meanwhile, former EPA administrator Scott Pruitt, a friend of the oil industry, allowed an increasing number of refineries to get waivers on the requirement to blend ethanol.

This constricted domestic demand and caused the price crash. One knock-on effect was that the industry was forced to export more to bring down its surplus production. Exports jumped 20 per cent to 1.6 billion gallons or 10 per cent of production. Canada was the destination for 21 per cent of the exports.

U.S. ethanol producers hope they can increasingly tap into growing foreign demand for the biofuel but they don’t want to be forced into it because of a stagnating domestic market.

The EPA’s Pruitt is now gone, ousted by a scandal over his lavish spending.

Trump’s nominee to replace him is Andrew Wheeler. He has to be approved by the Senate, and Democrats are not thrilled because he is a former coal industry lobbyist.

The current RFS system was designed with the idea that corn-based ethanol would set up the infrastructure for what would be a second generation biofuel, ethanol made from cellulose, which would have far better environmental credentials. But alas, although cellulose ethanol can be made, the technology needed to make it fully commercially viable is proving much more difficult than expected.

I was surprised by a recent U.S. Department of Agriculture study that found stronger environmental benefits than in the past. The study said greenhouse gas emissions associated with corn ethanol in the U.S. are 43 per cent lower than gasoline when measured on an energy equivalent basis. With further tweaking of ethanol refinery processes and improved on-farm conservation practices, GHG emissions from ethanol could be 75 per cent lower than gasoline, it said.

But these competing arguments aside, if you look only at grain farmers and the rural communities that host ethanol plants, the financial rewards are clear.

Rising ethanol production helps to soak up the production from rapidly rising corn yields. The three-year average corn yield for 2016-17 to 2018-19 was 175.9 bushels per acre, up almost 25 bu. per acre or 16 per cent from the same period 10 years before.

The system adds value to corn. The Renewable Fuels Association’s 2019 annual report, which provided many of the statistics used in this column, says a dry mill ethanol plant takes a bushel of corn priced at US$3.35 and produces $3.84 worth of ethanol, $1.16 worth of distillers grain and 16 cents of corn distillers oil.

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