Ethanol Industry Eyes Rebound

Times have been tough for the nation’s ethanol producers and the COVID-19 outbreak has only made matters worse. But as states begin to reopen businesses and people emerge for shelter in place orders, some in the industry find reason for optimism.

“The nation’s ethanol industry has been bleeding pretty hard,” says Randall Doyal, CEO of Al-Corn Clean Fuel in Claremont and former chair of the Renewable Fuels Association board of directors. “The last couple of years have been tough, but the last few months things have been tough to the Nth degree. I’ve been in the industry for 40 years and I’ve never seen anything like it.”

A combination of factors has led to sharp reduction in ethanol demand and consumption. The Environmental Protection Agency (EPA) has granted small refinery exemptions to dozens of oil refineries, relieving them of the obligation to blend ethanol with gasoline under the Renewable Fuel Standard. EPA granted exemptions to refineries that biofuel advocates say should never have been granted exemptions.

“Small refinery exemptions have been a destructive force for ethanol demand,” says Craig Willis, senior vice president for global markets for Growth Energy, the nation’s largest biofuels trade group. “The exemptions reduced the amount of ethanol they need to buy to meet their obligations under the renewable fuel standard. Four billion gallons have been exempted since 2016.”

Willis says U.S. ethanol production was just under 16 billion gallons in 2019.

“Economics have been ugly for a while with all the small refinery exemptions. Things turned absolutely brutal when Russia and Saudi Arabia went to war with each other over oil and just bashed the oil price,” Doyal adds. “Ethanol price fell like a rock. That started driving plants into negative margins. Then suddenly, because of COVID-19, everybody stopped driving. That lack of demand shows up very quickly.”

Major Impact

Minnesota has 18 ethanol plants with combined capacity of about 1.3 billion gallons year. Iowa boasts more than 40 plants and capacity of more than 4 billion gallons. Several plants in Minnesota have shut down or are running at reduced capacity because of the reduced ethanol demand. Guardian Energy in Janesville is shuttered at least through the end of May. Corn Plus in Winnebago closed in September. Others have trimmed their production.

Willis says small refinery exemptions and plummeting oil prices hurt ethanol production, but reduced demand due to coronavirus-related restrictions has been even more impactful.

“The biggest problem is nobody is driving,” Willis contends. “At its lowest point, gasoline consumption was reduced by 46 percent in the United States. Since ethanol is in 98 percent of gasoline, ethanol is going to follow. That’s where we’ve really been hurt.”

Willis says the United States is the largest gas consuming nation in the world, using about 35 percent of all gasoline.

“When the U.S. stops using gas, it’s going to be tough to hide,” Willis adds.

Loss of ethanol demand and reduced production means farmers have lost a key corn market.

Madelia farmer Harold Wolle is a member of the National Corn Growers board. He says what’s happening in the ethanol sector is directly impacting corn farmers. Corn prices hit their lowest marks in over three years.

“Numerous ethanol plants have closed, and a number have cut back to less than 50 percent of their normal production. We’re seeing that impact in estimates of increased corn carryover for next year,” Wolle says. “It’s tremendous the amount of devastation that has been caused.”

Doyal says the reduction in ethanol consumption has knocked corn demand down by 50 percent, and “that’s a big number.”

While some ethanol plants in Minnesota and Iowa have shut down or reduced their capacity, Doyal says Al-Corn has continued to run. They are also producing ethanol used in making hand sanitizer.

“Sanitizer isn’t a replacement, but it’s something,” Doyal says.

Look Ahead

Doyal says things are looking up for the ethanol industry as life in the U.S. gradually returns to normal. He says demand for ethanol in the Twin Cities, a big market for Al-Corn, is increasing. However, his plant is still operating below full capacity.

Even with increased ethanol demand, Doyal expects some of the nation’s shuttered ethanol plants will stay that way for good.   

“We are an industry that needed to get right-sized to demand. We were built beyond where demand was already,” Doyal explains.

Willis says gasoline consumption was down as much as 46 percent, and as gasoline demand goes, so does ethanol. If Americans start driving more again, ethanol demand should follow suit.

“Right now, we are seeing demand slowly start to come back up,” Willis says. “I fully expect that as demand increases, our producers will speed their plants back up or turn them back on as the market tells them to – but it may take time to get back to normal.”

Willis says the U.S. exports substantial amounts of ethanol around the world. Opportunities for increased exports to countries like China, Brazil, Mexico, Indonesia and Japan is reason for optimism. Ethanol was included in the list of agriculture products China agreed to buy in the Phase One trade deal with the United States.

Exports are vital for ethanol producers, but according to Willis, the first order of business that’s needed to get the nation’s ethanol industry back on track is to stabilize domestic markets.

“We have to have the U.S. market back driving close to normal. That’s my first ask,” Willis says. “Second, what would affect our producers the quickest would be for China to start buying.”

In addition to resumption of typical domestic driving habits and increased exports, resolving the small refinery exemption would give ethanol producers confidence that the RFS is going to work as it was intended, according to Willis.

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