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Biofuel Optimism

February 9, 2013
By: Ed Clark, Top Producer Business and Issues Editor
p38 Biofuel Optimism
  

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After a hard year, production and use could catch fire in the second half 2013

Year after year of upward ethanol production came to an end in 2012. In the last four months of the year, output fell 11% in light of sky-high corn prices and tumbling ethanol prices.

"Capacity is running about 86%, and 32 plants are shut down," says Bob Dinneen, president and CEO of the Renewable Fuels Association. "It’s a difficult time for the industry, but it’s not as bad as 1995-96 when 20% of the industry was shut down."

He believes that overall 2013 will be better than 2012, and 2014 better still. His optimism stems from the fact that the Renewable Fuels Standard (RFS) increases from 13.2 billion gallons in 2012 to 13.8 billion this year to more than 14 billion in 2014.

Fuel ethanol output fell from an average of 900,000 barrels per day in early 2012 to 820,000 barrels per day the second half of the year. Ethanol production will remain at those levels through mid-2013 before recovering to pre-drought production levels, according to projections by the Energy Information Administration (EIA).

Looking to 2014, the EIA forecasts production to reach 915,000 barrels per day. That’s 14 billion gallons for the year, up from the 13.3 billion estimate for 2013. If this happens, the ethanol share of the gasoline pool increases from an average of 9.6% in 2012 to almost 11% by the end of 2014.

If the 14 billion gallon figure is reached in 2014, it will create demand for 5.2 billion bushels of corn next year, an additional 300 million bushels than EIA projects for use in 2013.

Corn acres needed. "The corn crop in 2013 is the single biggest factor (for that to occur)," says Todd Becker, president and CEO of Green Plains Renewable Energy, the nation’s fourth-largest ethanol producer. If the corn crop is off and running this summer, he sees production reigniting.

"The industry needs sub-$5 corn," he says. "I’ve made money with $7 corn and with $5 corn."
The rub this time around is that ethanol prices are much lower, which combined with record corn prices, puts the squeeze on plant margins.

With some plants scaling back or even halting production for a time, is there a risk for producers who lock in contracts with ethanol plants? Not any more than selling to any other processor, says David Ripplinger, economist at North Dakota State University.

"Counter-party risk is always there," he says. "It’s Marketing 101." He has not heard any cases of farmers with ethanol corn contracts not getting paid.

In for the long haul. What amazes Ripplinger the most is not that production is down 11%, but that it is as high as it is—which speaks to the staying power of the industry.

Help might be on the way for ethanol producers. If average corn yields are 160 bu. per acre for the 2013 crop, the cost of producing ethanol drops a substantial 80¢ per gallon, from $2.40 to $1.60, assuming corn prices of $5 per bushel, according to Bruce Babcock, economist at Iowa State University.

In his view, the ability to consume more ethanol in the U.S. is "severely constrained" by the E-10 blend wall, however. Approximately 135 billion gallons of finished motor gasoline is expected to be consumed in 2013, which means that if ethanol blends are limited to 10%, the maximum contribution from ethanol is about 13.5 billion gallons. The blend wall will make it difficult to meet the 2014 mandate, which might pressure the Environmental Protection Agency (EPA) to lower it.

Other factors have hit the industry hard, too, says Tom Buis, president and CEO of Growth Energy, an ethanol trade group. An extremely high level of overproduction took place in late 2011 to take advantage of the Volumetric Ethanol Excise Tax Credit before its sunset. The overproduction continued into early 2012.

International challenges have come, too, such as the European Union’s (EU) accusation of the U.S. was "dumping" ethanol into the EU, which has basically shut down EU exports. Sizeable exports to Brazil have also dried up—in fact, Brazil has been exporting ethanol to the U.S., taking advantage of U.S. policies.

One reason for the optimism of ethanol boosters is that the combination of RFS and RFS2—the requirement for cellulosic and other advanced biofuels—means that renewable fuels must be a full 30% of the gasoline market by 2020.

"If we break the blend wall and get cellulosic on stream, it will happen," Buis says. Furthermore, it was only in January that the Washington, D.C. Court of Appeals threw out a court case against E15 by petroleum interests, the last legal hurdle. In 2012, EPA gave E15 its thumbs-up, following years of pressing by ethanol interests.

Biofuels go beyond corn. In addition to corn-based ethanol, the cellulosic industry and use of agricultural residue is on the cusp of taking off. Five plants are scheduled to be up and running this year. More will follow, Dinneen predicts. Once they are in operation, he believes cellulosic ethanol will likely see growth similar to corn-based ethanol plants.

Others aren’t so sure. Darrel Good, University of Illinois ag economist, thinks RFS2 needs to be re-examined.

In his view, neither E15 nor cellulosic ethanol use are growing at the rate they should, which means for RFS2 to be met, the oilseeds, notably soybeans, would have to kick it up a notch.
Complying with the 2014 mandate of more than 14 billion gallons seems unachievable, Good says.
"We’re not consuming enough fuel," Good says. The only way it will be achieved in the short run is through the use of credits the industry has accumulated from previous years.

"Either EPA has to write down the mandate or it has to be made up with biodiesel," he says.
Biodiesel has an even larger hurdle than ethanol to face in 2014, Good says. For 2013, the mandate calls for 2.75 billion gallons of biodiesel, which increases to 3.75 billion gallons for 2014. For 2012, U.S. biodiesel capacity was 2.1 billion gallons.

To meet the biofuels mandate, it would require oil from an additional 360 million bushels of soybeans, Good says. In 2012, 445 billion bushels were used for soybean oil.

If biodiesel reaches its mandate, would it drive soybean prices sky high? Somewhat, but it also might drive soybean meal lower due to more crushing to extract oil. In an interesting twist, meeting the biofuels mandate could lower feed costs for livestock producers while strengthening farmer profits. "The big story in 2014 could be biodiesel, not corn ethanol," Good says.

A look ahead. EPA can adjust renewable fuel targets from ethanol to biodiesel under RFS and RFS2—it already has. For 2012, the cellulosic mandate under RFS2 was reduced from 500 million gallons to 8.65 million gallons.

Changing the law has its drawbacks, though, Buis says. It sends the wrong signal to industry investors and banks, which the petroleum industry wants. "The American Petroleum Industry has made gutting the [RFS2] program its highest priority," he says.

Still, Dinneen says, ethanol is clearly a success story. "In 2005, the U.S. was 61% dependent on imported energy. Today it’s 41%, and 80% of the increase in U.S. liquid fuel is ethanol."

Corn ethanol and biodiesel, along with cellulose, biobutanol, fuel from algae and other fuels will continue to play a large role in the future. "I’m bullish that renewables can make up 30% of fuel," Dinneen says.

Ethanol and Biodesiel Production Snapshot

While the Renewable Fuels Standard (RFS) launches many a debate, no one can deny that biofuels are here to stay. Here is a quick look at production estimates for the biofuels industry going forward:

  • The RFS increases from 13.2 billion gallons in 2012 to 13.8 billion this year. In 2014, it increases to more than 14 billion.
  • Ethanol output fell from an average of 900,000 barrels per day in early 2012 to 820,000 barrels per day the second half of the year. The Energy Information Administration (EIA) forecasts production to reach 13.3 billion  gallons for 2013, and 14 billion gallons for 2014.
  • If the 14 billion gallon figure is reached in 2014, it will create demand for 5.2 billion bushels of corn next year, 300 million more than for 2013.
  • Biodiesel needs to contribute 2.75 billion gallons of oil in 2013 to meet the RFS, which means crushing an additional 360 million bushels of soybeans compared with 2012. The RFS jumps to 3.75 billion gallons in 2014.


You can e-mail Ed Clark at eclark@farmjournal.com.

p38 Biofuel Optimism Chart

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FEATURED IN: Farm Journal - Mid February 2013

 
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