MN ethanol industry will ride through time of ‘tight margins’

With continuing low cost gasoline erasing much of ethanol’s price advantage, this is a time of belt tightening for the ethanol industry, according to industry representatives in Minnesota. They speculate that these conditions may last anywhere from the next 12 months to two years. Even with corn reaching very low prices, profit margins for ethanol are tight.

On Dec. 14, the Environmental Protection Agency (EPA) announced a reduction in the ethanol volume requirements for fuel blenders who are obligated under the Renewable Fuel Standard (RFS). Under the statute, passed by the US Congress in 2007, blenders were required to use a total of 15 billion gallons of conventional (corn-based) ethanol in 2015. EPA ruled that blenders will fulfill their obligation by using 14.050 billion gallons. Next year, EPA set the requirement at 14.5 billion gallons instead of 15 billion.

“They are taking authority that I don’t think exists statutorily,” said Randall Doyal, CEO of Al-Corn Clean Fuel in Claremont, Minn. “I don’t think they had a legal right (to change the volumes). If you look at the RFS law you can see fairly clearly that it is about supply, not infrastructure.”

The law was intended to require the industry to develop whatever infrastructure was needed, in order to achieve the level of usage set in the law.

“I don’t think they had a methodology for their decision,” said Rick Serie, CEO and General Manager of CornPlus, an ethanol cooperative in Winnebago, Minn. “They should have left it where it was originally set. They bring up the blend wall all the time, but I don’t think that’s the issue. Congress put the RFS in place to increase use of ethanol and now they are backing off from it. I guess that’s typical government. Changing things. But I think they should have left it the way it was and let the markets bring about the infrastructure that’s needed for it.”

Serie said the EPA decision doesn’t help the low margin conditions for ethanol producers, which he expects will last the next 12-16 months.

“Some plants may slow down, or even shut down,” Serie believes. “We consider that, too, when the margins get really low. Should you just produce more in order to lose more — I don’t think so. It’s a matter of good management, and you look at all avenues to try to correct the situation. Shutdowns or slow downs are the worst-case scenario, but sometimes you have to do that.”

Without increased domestic demand for ethanol, the US ethanol industry will put more effort into exporting ethanol — a marketing strategy that has already paid off.

“Exports? That is one of the things that have kept our ethanol netbacks higher than I would have anticipated,” Doyal said. “The export market has grown. We are going to all kinds of interesting places. Canada is a big partner, which makes sense, because it’s easy to get there. We are seeing more exports into the Asian Rim: the Philippines has come on strong, India is coming along. China has even started importing a little. What surprises me is to see exports from the US.. to the United Arab Emirates. That just floors me. When I started in this business 33 years ago I never thought we would be exporting ethanol to the Middle East. That one I have to smile about.”

Serie and Doyal believe it is possible to build the domestic market through installation of ethanol infrastructure.

“Yes, we can get above the levels of the so-called blend wall. We have to get those blender dispensers out there, so we can sell E15 — let the consumer make that judgment of whether or not they want to use it,” says Serie. “I have a flex-fuel vehicle and I burn E15, and I get better mileage than E10. I think all we have to do is give the consumer choice. If we do give them a choice, they will choose ethanol. Because it’s better for the environment, it’s better for the country.”

Despite assertions by the EPA that the blend wall poses a problem for implementing the statutory levels of the RFS, there are places that have gotten over the blend wall, and Minnesota is one of them.

“The blend wall has already been proved to be artificial,” says Jerry Demmer, a farmer near Albert Lea and a member of the National Corn Growers Association Ethanol Committee. “With the amount of E85 and E15 being sold in the state, our usage is at 12.5 percent.”

Jerry Demmer farms in Clarks Grove and is heading to Kansas City, Kan., for a public hearing on the RFS.

Jerry Demmer farms in Clarks Grove and serves on the National Corn Grower’s ethanol committee.

Demmer is optimistic about the effect of a new cost-share program funded in-part by the USDA to help fueling station owners install ethanol blender fuel dispensers that can offer drivers the choice of E15,  while it would also offer higher blends to flexible fuel vehicle owners. Farmers and ethanol advocates (including the Minnesota Corn Research & Promotion Council) are putting up additional private funding to help with these pump conversions. The program could fund up to 620 new flex-fuel dispensers across the state.

“When we get blender pumps out there, and if we have the spread in the gas price versus the ethanol price, where drivers can save five or ten cents by using E15 compared to regular unleaded, then they will try E15,” Demmer said. “They’ll fill up, and afterwards they will say, ‘that didn’t hurt my car,’ and they buy more. We have to get those pumps in. We are doing that. The competition this creates will spur more adoption. When the gas station across the street can sell their fuel for 10 cents less, the drivers are going to go to them, and the first gas station will realize they have to have it, too.”

Demmer mentioned that a recent vote by the NCGA Ethanol Committee favored support for what’s called “E25 standardization,” a move to universal installation of infrastructure that can handle at least 25 percent ethanol. Because fueling stations will have to convert their card readers to utilize the new credit cards with security chips, this will be an opportunity to offer station owners a cost share program to upgrade to E25 capability.

“When and if we get to E25 as a standard gasoline blend, the pumps will be in place, so that won’t be an obstacle,” Demmer said.

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