Improving profit margins, mainly from lower corn prices, and growing demand appear to be pulling the ethanol industry out of an 18-month struggle, but plenty of challenges remain, including concerns about greenhouse gas emissions and the commercialization of cellulosic ethanol.

Ethanol capacity and production continue to grow, albeit at a slower pace, to meet the 2009 Renewable Fuels Standard (R.F.S.) of 11.1 billion gallons (all renewable fuels) mandated by the U.S. government. Recent declines in corn prices have improved margins for ethanol refiners, at least those with minimal debt.

"This past year presented unique challenges and economic difficulty as producers faced record input costs, lower ethanol values and the evaporation of credit in the market," Bob Dinneen, president and chief executive officer of the Renewable Fuels Association (R.F.A.) said earlier this year. The R.F.A. is the ethanol industry’s national trade association and lobbying arm.

The past 18 months have brought severe struggles for parts of the industry. There had been predictions of consolidation after the resurgence of ethanol and the rapid growth that began around 2005.

Perhaps the most obvious sign of trouble was the bankruptcy filing of VeraSun Energy Corp. on Oct. 31, 2008, and subsequent sell off of its assets. Seven ethanol refineries, or about half of its total capacity at the time, were purchased by Valero Renewable Fuels, a division of Valero Energy Corp., San Antonio, the nation’s largest petroleum refiner and marketer. Other VeraSun facilities were sold to secured lenders. VeraSun was one of the country’s three largest ethanol producers and along with POET Biorefining and Archer Daniels Midland Co. accounted for a third of total U.S. ethanol production capacity in 2008.

Ironically, VeraSun had reported record high second-quarter sales and earnings in August 2008. The bankruptcy resulted from VeraSun’s commodity hedging practices as well as from the state of the ethanol industry at the time, among other things.

POET emerged as the nation’s largest ethanol producer with 1,469 million gallons annual capacity, or about 14% of total U.S. operating capacity, according to R.F.A. data. ADM is second with 1,070 million gallons capacity, or 10%, of the total. POET has another 75 million gallons of capacity expanding or under construction while ADM has 550 million gallons of capacity in the works, according to the R.F.A. When and if the new capacity comes on line, the two companies will have nearly equal capacity and will be more than twice as large as any other domestic producer.

Valero now comes in third with 670 million gallons operating capacity, followed by Hawkeye Renewables, L.L.C. with 445 million gallons. After that no single entity has more than 400 million gallons, with many companies consisting of single plants in the 40-million to 110-million gallon range.

As of mid-June there were 196 refineries with "nameplate" capacity of 12.6 billion gallons of ethanol per year and operating production capacity of 10.8 billion gallons annually, according to the R.F.A. At least 23 plants were under construction or expanding with additional capacity of 1.9 billion gallons, the R.F.A. said.

About a year ago R.F.A. data showed 161 refineries with capacity of 9.4 billion gallons and about 50 more plants with total capacity of 4.3 billion gallons under construction or expanding.

 

Output strong, margins improving

The R.F.A. expects 2009 ethanol production "well in excess of 10 billion gallons, representing nearly 9% of America’s gasoline supply." Production in 2008 was estimated near 9 billion gallons.

Ethanol production in April, the most recent data available, was estimated at 807.2 million gallons, down 26 million gallons from March but up 99 million gallons, or 14%, from April 2008, according to the Energy Information Administration of the U.S. Department of Energy.

Ethanol use in April was 848.1 million gallons, up 10 million gallons from March and up 97 million gallons, or 13%, from April 2008, according to the R.F.A. April stocks were estimated at 623.5 million gallons, or about 22 days’ supply.

"Capacity utilization today is about 85% to 90%," said Matt Hartwig, R.F.A. communications director, adding that conditions were "absolutely" better than a few months ago.

Margins improved to "double-digit per-gallon profits" in early July because of the large drop in corn prices, according to calculations by Data Transmission Network for a "hypothetical" 50-million-gallon plant. That compared with net losses the previous six months and with a 38c-a-gallon loss a year ago when corn was near $7 a bu, D.T.N. said.

"I think we have seen a bit of a return of ethanol margins, certainly enough so plants can cover their variable costs," Joseph Glauber, chief economist of the U.S. Department of Agriculture, said in June. "Again, the long run aspects of the industry, one way or another, the way the R.F.S. works is that gasoline blenders are going to have to utilize ethanol, and that means in the long run, there is demand for those products. So, I think we’ll see a return to health in the industry."

Ethanol prices have continued to follow corn prices, for the most part. But with corn as the major input cost, recent large declines in corn prices have benefited refiners. Corn and ethanol futures last week were at four-month lows with ethanol still 7% above its 52-week low and corn 16% above its 52-week low set in early December 2008. Crude oil, while at a six-week low last week was 75% above its 52-week low set in December.

 

Smooth road gets bumpy for ethanol

It looked as if ethanol was in for a smooth ride after President George W. Bush signed the Energy Policy Act of 2005, which called for an R.F.S. of 7.5 billion gallons by 2012, nearly double the level then being used. And the Energy Independence and Security Act of 2007 raised the level for corn-based ethanol to 15 billion gallons by 2015.

Ethanol futures prices in Chicago, which had traded between [email protected] a gallon from June 2004 to June 2005, skyrocketed to more than $4 a gallon in June 2006, when corn prices were around $2.30 a bu and crude oil was near $70 a barrel. Ethanol plants, almost all using corn as a feed stock, could hardly be built fast enough, profit margins were tremendous and producers not only covered variable costs but quickly paid down or eliminated debt.

But the picture began to cloud in late 2007 and early 2008 as corn and other grain and oilseed prices marched toward record highs, with much of the blame put on the ethanol industry because of its increased use of corn.

Corn used to make ethanol, which had been about 11% of the 2003 and 2004 corn crops, began climbing to about 15% of the 2005 crop, 20% of 2006 production, 23% of 2007 outturn and then jumped to 31% of the 2008 crop. In its June World Agricultural Supply and Demand Estimates, the U.S.D.A. projected 4,100 million bus of corn, or 34% of the 2009 crop, would be used for ethanol in 2009-10 (September-August), up 9% from current year use of 3,750 million bus.

Although several other factors also contributed to the rise in grain and food prices, not the least of which were record high energy prices, the debate grew intense. Some states last year requested their R.F.S. levels be reduced, but the Environmental Protection Agency denied those requests.

The rising percentage of corn use and record high prices fueled a global debate about food versus fuel, which, while unsettled, appears to have been pushed to the backburner amid the current global recession, as have concerns about water use to make ethanol. The amount of corn used for food during the period has held near a constant 10% to 11% of annual production, according to the U.S.D.A.

A year ago the industry was assessing the alternative energy policies of the two major presidential candidates, Barack Obama and John McCain. Mr. Obama appeared more favorably disposed to alternative energy. Corn and crude oil prices had just come off record highs. And there was barely a hint of the severity of the economic downturn that was to come in the second half of 2008, ultimately depressing demand for transportation fuel in general.

The Obama administration has carried through as a strong supporter of alternative fuels, including ethanol, but a relatively new debate has surfaced about greenhouse gas emissions and indirect land-use (including land in South America) provisions in the Notice of Proposed Rulemaking for the R.F.S. from the E.P.A., for which the comment period was extended to Sept. 25.

 

New push to raise blending rate

Even as the greenhouse gas and land-use debates heat up, other issues persist and the economy struggles, the corn and ethanol industries and several states are pushing for an increase beyond the current 10% blend rate of ethanol in gasoline, with some seeking a 15% blending rate, which may effectively increase the amount of ethanol used by 50%.

"We think the science is there to move to E15," Mr. Hartwig said.

The June 30 U.S.D.A. Acreage report indicated 87 million acres planted to corn this year, 4% more than the industry expected and 1% more than a year ago. At the same time the U.S.D.A. estimated June 1 corn stocks at 4.27 billion bus, also above expectations and up 6% from last year.

"For 2009-10 the greater availability of corn supplies makes it more likely that the E.P.A. will increase the ethanol blend rate from the current 10% to 12% or 13%, effective Jan. 1, 2010," said Terry Francl, senior economist at the American Farm Bureau Federation.

The R.F.A. has been pushing for a blend rate above 10% "to allow gasoline blenders and refiners to take full advantage of the benefits of ethanol blending."

"Increasing ethanol content reduces foreign oil consumption and our rising trade deficit, and ensures a market will exist for the next generation of ethanol produced from cellulose," Mr. Dinneen said.

The E.P.A. has until December to issue a ruling on the E15 waiver, although test results won’t

be available until next spring.

 

Cellulosic might not be five years off

"For the better part of the last 25 years, the development of cellulosic and next generation ethanol technologies has often been just around the corner," the R.F.A. said in its 2009 Ethanol Industry Outlook in February. "But that is all changing today. From California to Pennsylvania, South Dakota to Florida, ethanol producers are rapidly commercializing technologies that utilize new feedstocks in additions to corn and other grains."

About 25 cellulosic ethanol projects in 21 states with total production capacity of more than 370 million gallons annually were under way as of Jan. 1, 2009, according to the R.F.A. The average production capacity of cellulosic ethanol plants under development, with only one larger than 40 million gallons annually, is considerably smaller than corn-based plants, of which most recent facilities have been 55 million or 110 million gallons.

"I think the markets have adjusted and the rapid growth of (ethanol) capacity that we saw initially has certainly slowed now for a number of reasons," Mr. Glauber said. "One actually is that we are approaching the 15-billion-gallon mark and so the interest will turn to the cellulosic side, and there investors are going to have to see long-run potential for profits."

The R.F.S. for corn-based ethanol tops out at 15 billion gallons in 2015 through 2022. The cellulosic R.F.S. begins at 100 million gallons in 2010, climbs to 3 billion gallons in 2015 and reaches 16 billion gallons in 2022.

"There are big challenges," Mr. Glauber said. "Production costs are quite high. There are logistical issues with regard to storage and movement. It rally varies a lot by feed stock. That’s why it’s given a very long time to implement."

 

 

Biodiesel industry is in dire straits

The young biodiesel industry, with production and capacity less than one-tenth that of ethanol, appears to be at the height of a struggle to survive, not unlike the ethanol industry was in 1985 when 45% of the nation’s ethanol plants went out of business.

As of early May there were 176 plants with the capacity to produce about 2 billion gallons of biodiesel annually, but many sat idle and about 20 had gone out of business, according to the National Biodiesel Board (N.B.B.).

"Biodiesel has had very big problems of its own in terms of margins," said Joseph Glauber, chief economist of the U.S. Department of Agriculture. "We see very low capacity utilization rates, and have seen at times some biodiesel producers switch to edible greases and animal fats. Those oils have typically traded at big discounts to soybean oil, so they are an attractive feedstock.

"For the ethanol producer, there are efficiencies to be gained in terms of getting more sugar from corn. For the biodiesel producer, the technology is just different in terms of transformation of vegetable oil into biodiesel. There’s not a lot of room for large efficiency gains; they already are quite efficient. So those margins have been poor."

In its June 10 World Agricultural Supply and Demand Estimates, the U.S.D.A. estimated soybean oil used for methyl ester (biodiesel) in 2008-09 (October-September) at 1,750 million lbs, down 41% from 2,981 million lbs in 2007-08. Use in 2009-10 was projected at 2,200 million lbs, up 26% from this year but still 26% below last year’s level.

Commercial biodiesel production in March was 30 million gallons, about half the monthly average produced in 2008 and only about 20% of national capacity, according to data from the N.B.B.

"If this continues, it will reduce industry production to half the 700 million gallons produced in 2008," said Joe Jobe, chief executive officer of the N.B.B. "America is at risk of going backwards in energy security.

"A primary reason for this dramatic downturn is the absence of a federal Renewable Fuels Standard (R.F.S.). The R.F.S. would initially require the use of 500 million gallons of bio-massed based diesel, which would substantially stabilize the young biodiesel industry as it struggles to compete on an uneven playing field."

It was an R.F.S. mandate in the Energy Policy Act of 2005, along with subsidies that biodiesel already has, that propelled the ethanol industry from production of 3.4 billion gallons in 2004 to about 9 billion gallons in 2008.

Currently the Environmental Protection Agency (E.P.A.) is in the midst of R.F.S.-2 rulemaking, which, under the Energy Independence and Security Act of 2007 requires use of 500 million gallons of biodiesel annually starting in 2009, increasing to 1 billion gallons in 2012. Those rules require renewable fuels to reduce greenhouse emissions by 50% from petroleum based diesel fuel, including indirect emissions and land use decisions both in and outside the United States.

Manning Feraci, vice-president of federal affairs at the N.B.B., said at a June 9 E.P.A. hearing the proposed rules relied on "dubious land use assumptions and inaccurate data" and included "a huge error pertaining to nitrogen emissions" that would restrict "feedstock for low-carbon diesel replacement fuel to only animal fats and restaurant grease."

Without the inclusion of vegetable oils, which account for more than 60% of feedstock, it would be "all but impossible to meet the volume goals established by the statute," Mr. Feraci told the E.P.A.

The E.P.A. comment period for R.F.S.-2 rulemaking, originally set to expire July 27, last week was extended to Sept. 25.