Future crucial for crop demand and prices
Ethanol margins returned to the black during late spring and production bounced back from last year’s lows—increasing the corn grind and demand, even for pricey old-crop corn.
In addition, companies such as DuPont, POET-DSM, Abengoa and about 20 others are moving forward on cellulosic production, which uses corn byproducts. They are expected to reach up to 100 million gallons in 2014. This is good news for the bioenergy sector and farmers.
While no one knows for sure what bioenergy has meant to producer bottom lines, a study from Purdue University concluded that if the Renewable Fuels Standard (RFS) mandates had been waived in 2012, the impact on corn prices could have ranged from very little to more than $1 per bu. In total, the biofuels industry means billions of dollars for producer returns each year.
Despite the good news, some dark clouds have emerged. The petroleum industry has launched a full-court press to roll back the RFS.
Linked to that is the market reality. The effective 10% blend wall for ethanol has been reduced because gasoline consumption has fallen. This means if E15 and E85 don’t catch fire, corn use for ethanol could fall.
With global corn production increasing and weak U.S. export demand, continued biofuels growth is key to corn profitability.
"Mandates of 16 billion gallons of cellulosic ethanol by 2022 are realistic."
Production Bounce. High drought-driven corn prices forced many ethanol plants to either close their doors or cut production. Today, they operate at 87% to 89% capacity, up from 84% to 85% in 2012.
Archer Daniels Midland (ADM) says it’s operating at 100% capacity, and expects positive, though volatile, profits for the remainder of the year.
"Plants figured out how to make $7 corn work," says Chad Hart, ag economist at Iowa State University. How? Ethanol prices jumped 10¢ to 40¢ per gallon higher than costs.
The production change has been dramatic. The week of Jan. 25, the ethanol industry was using 82 million bushels of corn, but by the third week of June, that had increased to 95 million, a 15% increase. The forecast looks even better for 2014.
ADM’s Patricia Woertz, chief executive officer, expects the market for E85 to expand so blenders can meet RFS requirements that increase from 13.8 billion gallons in 2013 to 14.4 billion gallons in 2014.
Others are less optimistic. E85 costs more than E10 and has a reduction in energy value. Because gasoline consumption has declined, the 10% blend wall is likely to slow production even as the RFS mandate increases, says Sterling Liddell, Rabo AgriFinance senior vice president.
In 2013, the 10% blend wall will fall to 12 billion to 12.5 billion gallons—more than 1 billion less than the 13.8 billion mandate. He does not look for E15 or E85 to take root during the next three years.
Another challenge is Brazil’s production surge, in part to export to the U.S. to meet advanced biofuel mandates, and because world sugar prices have hit the skids. Brazilian ethanol is made from sugarcane, which qualifies as an advanced biofuel because the crop is perennial.
"Overall, I think it will be a wash," Hart says. "Brazilian ethanol will be imported to the U.S., and U.S. corn ethanol will be exported to Brazil."
Cellulose Arrives. While the projected 100 million gallons of cellulosic ethanol in 2014 remains short of mandated targets, it represents an important advance and is more than a 10-fold increase from 2013.
"Realistically, cellulose is getting closer," says Wallace Tyner, a Purdue University ag economist. "There have been some important breakthroughs. Whether Congress will have the patience with cellulose any longer, however, I don’t know." Each year, the Environmental Protection Agency (EPA) has had to reduce cellulosic Congressional mandates.
Major players are more optimistic. "RFS mandates of 16 billion gallons of cellulosic ethanol by 2022 are realistic," says Jan Koninckx, DuPont Industrial Biosciences global business director for biorefineries.
"Ethanol Plants figured out how to make $7 corn work."
"We have made great progress," says Koninckx, both in plant technology as well as new enzymes that break down cellulosic materials more easily and cheaply. As such, production, costs are coming down. That means a new market for corn stover and other biomass, he says.
Last fall, DuPont broke ground in Nevada, Iowa, on the world’s largest cellulose plant—a 30 million gallon facility—with production expected in late 2014.
A 25 million gallon capacity cellulosic plant by POET-DSM in Emmetsburg, Iowa, will begin initial phases of production in 2014.
What has taken cellulose so long to become reality? "I don’t think it has," Koninckx says. "We went from investment in the technology to where we are today with a commercial plant in five years."
Mandates Hang. Never has the oil industry attacked ethanol and bioenergy so hard, both in Congress and in the courts, says Tom Buis, CEO of Growth Energy. "It’s all about market share," he says. "Every additional drop of ethanol is one less drop of petroleum."
The petroleum industry has mounted a massive campaign to prevent ethanol from growing beyond a 10% blend. If the RFS2 is fully implemented, the oil industry must embrace higher blends.
"That’s why it’s happening now," Buis says. "The fight is over the blend wall, pure and simple."
Bills to change the RFS have been introduced in the House and Senate, and hearings are underway.
Specifically, oil companies are concerned that the 10% blend wall is 13.3 billion gallons of corn ethanol, but the 2013 mandate calls for 13.8 billion gallons, which goes up to 14.4 billion next year and flat lines at 15 billion.
Tyner says oil companies fulfilled their obligation to EPA this year through the use of credits, but that won’t be an option for 2014 or 2015.
In response, the ethanol industry is counter-attacking, and lawmakers friendly to biofuels have introduced bioenergy bills in Congress.
Biofuels scored political successes. First, the U.S. Supreme Court refused to review a ruling that supported EPA’s decision to approve E15. Second, in his June Climate Action Plan speech, President Obama stated his support for biofuels and the RFS because of the benefits to energy security, jobs, rural development and reduced greenhouse gas emissions. That will make it more challenging for petroleum interests to overturn the RFS, some say.
Despite chatter in D.C., ADM’s Woertz predicts Congress is likely to stay the course on ethanol policy.