Economics, Expectations and Exports

FROM THE JANUARY ISSUE: Ethanol Producer Magazine talked to three experts about the past year, and what they see moving into 2020.
By Lisa Gibson | December 17, 2019

2019 brought a Reid vapor pressure waiver for E15, but it also brought excessive small refinery waivers and low margins for ethanol plants. The year ended with plenty of topics still on the table, hotly debated issues and battles still being fought.

Ethanol Producer Magazine asked for input from a producer, DJ Eihusen, president, CEO and board chairman for Chief Ethanol Fuels Inc. in Hastings and Lexington, Nebraska; an exports expert, Ryan LeGrand, president and CEO of the U.S. Grains Council; and an overall industry and policy expert, Monte Shaw, executive director of the Iowa Renewable Fuels Association. Opinions from these three bring well-rounded perspectives on markets, margins, predictions and expectations.

Here’s what they had to say.

DJ Eihusen, President
CEO and Board Chairman
Chief Ethanol Fuels Inc.

Q. Chief Ethanol was Nebraska’s first dry-grind ethanol plant, correct? How has the company been a pioneer in the state’s ethanol industry?

A. Chief Ethanol Fuels Inc. in Hastings, Nebraska, was the state’s first dry-grind beginning production in late 1984. This was the only commercial operating ethanol facility in Nebraska until the early- to mid-1990s. The Hastings plant has undergone many upgrades and expansions over the years to keep it modern and competitive. Chief Ethanol acquired a Lexington, Nebraska, facility in May of 2016. 

Q. How has Chief Ethanol coped with low margins?

A. The last several months have been extremely difficult for ethanol production. The continued undermining of the Renewable Fuel Standard and continued trade wars have taken a toll on the industry. Chief Ethanol believes that a return to the intent of the RFS and a normalization of trade would lead to positive results for the entire industry. There have been recent views expressed that the U.S. has too much production capacity. But Chief Ethanol believes that the demand structure has been compromised. Also, we are fortunate in that Chief Ethanol is a business unit within Chief Industries Inc., a diversified corporation. The diversity of the parent company has helped us to navigate through a difficult margin environment within the ethanol industry.  

Q. Has the idling and closing of ethanol plants as a result of low margins affected the market and demand for Chief Ethanol’s production?

A. Chief Ethanol has a long history of continual operations for their facilities. Certainly, there have been many occasions of negative margins due to drought, supply and demand issues, logistics, etc. over the years but Chief has persevered. Currently, many other locations have had a miserable 2019 crop production year leading them to a higher basis or lack of crop supply. This has resulted in better ethanol pricings overall.

Q.  Has this been one of the worst years for the ethanol industry in the company’s memory? Why or why not?

A. Absolutely, this has been a difficult year. In the past, most issues have had a short or specific time period. For example, the 2012 drought year, supply-and-demand market actions, and the next growing season created some painful months but there was an end in sight. Currently, with the Washington, D.C., double-speak and misinformation, the ethanol and related industries don’t know when and if there will be a resolution for the RFS and trade issues. This has led to a much-prolonged period of difficulty for the industry.

Q.  How did the 2019 corn crop affect operations at Chief Ethanol, and what is the outlook for 2020?

A. As mentioned before, 2019 has not been a good year for crop production. In south-central Nebraska, we did have an overabundance of rainfall during the normal planting time period. However, the local farmers did a stellar job in getting a crop planted and produced. It appears south-central Nebraska is the garden spot of the country. It sounds like many other areas of the country are not as fortunate as we have been. We will have adequate corn supplies for the coming year and optimistically look forward to 2020.

Q.  What policy issues have you been following in 2019, and what will the big battles be for the ethanol industry in 2020?

A. Obviously, the U.S. EPA’s mismanagement of the RFS is something we continue to carefully monitor, specifically their abuse of small refinery exemptions (SREs) and failure to reallocate those waivers in a meaningful way. We are hopeful the Supplemental Rulemaking to the 2020 Renewable Volume Obligation will fulfill President Donald Trump’s promise that 15 billion gallons means 15 billion gallons by reallocating the actual average of waived volume from 2016 to 2018.

This was supposed to be a banner year for E15 use, and while we’re grateful Trump directed EPA to finalize the rule allowing year-round access to E15 across the entire country, the reality is the SRE waivers have undermined that effort.

We’re also closely following the trade situation because exports are such a critical piece of the puzzle for Chief. We are hopeful a deal can get done with China because of their goal to eventually go to E10 nationwide. Resuming robust exports to China would be game changing for our industry. Related to trade, we’re also hopeful Congress will ratify the U.S.-Mexico-Canada Agreement (USMCA) before the end of the year. Canada is our most reliable export market for ethanol over the course of time and we believe there is a big potential for increasing exports to Mexico in the coming years.

In addition, 2020 is an election year. We will pay attention to what Trump and Democratic candidates have to say and do on ethanol-related issues. We also support efforts by groups such as the American Coalition for Ethanol and others to pursue new proactive legislative proposals to increase domestic demand for ethanol based on its high-octane and low-carbon attributes. We hope this legislative effort picks up bipartisan support in 2020.

Q.  Are you in favor of a high-octane rule? Why or why not?

A. In short, yes but we actually believe there are a couple of ways to get to a higher-octane fuel. One of those certainly involves EPA using its existing authority to issue a rulemaking to require a minimum octane in future fuel. We know EPA asked for comment from stakeholders about the potential for E30 in future engine technologies, as part of the rule to determine the Corporate Average Fuel Economy greenhouse gas (GHG) standards for 2021 through 2026 model year vehicles, so we support comments that the industry made to EPA in favor of a new E30 high-octane fuel. However, we also know that EPA Administrator Andrew Wheeler has publicly poured cold water on the idea that his agency would issue a high-octane rule. Again, that is why we’re also supportive of efforts by various groups to pursue new proactive legislative proposals to increase domestic demand for ethanol based on its high-octane and low-carbon attributes. We’re not really picky on how we get to a new high-octane fuel, as long as we eventually get it done.

Q.  What technology opportunities do you see being important in the year ahead?

A. Technology advances have been critical for the ethanol industry, lowering the carbon footprint while increasing yields and plant efficiencies that push this renewable fuel to the forefront of providing a high-octane, cleaner-burning fuel for today and the future. 

Chief continues to look at new and improved processes to implement for the future.

Ryan LeGrand
President and CEO
U.S. Grains Council

Q. What is the outlook for progress in establishing the Mexico market in 2020? Is this the year we could see large volumes heading across the border? Why or why not?

A. We do expect to see larger volumes begin to ship to Mexico in 2020. Some privately owned fuel terminals will be opening in 2020 and the value proposition is right for Mexico to import and blend ethanol into their fuel matrix, so we do expect to see larger volumes start to flow south of the border in 2020.

Q. What is holding up approval of E10 in Mexico’s three largest cities, and what has been done to get that approval?

A. There have been a number of factors, but I think it can be attributed to the fact that the Energy Regulatory Commission, the government entity which establishes fuel specifications, saw a large turnover in their commissioner ranks in the last year. They have just recently filled the vacated commissioner positions and we believe they will see the evidence before them, including a recent study by the Mexican Petroleum Institute that proves E10 will not adversely affect their air quality, and they will proceed to open their three largest cities for E10 blending.

Q. What is the potential market in Mexico overall, and when do you foresee that full opportunity being present for U.S. ethanol?

A. It is hard to say when that full potential can be reached, but the Mexican fuel market is currently at 12.5 billion gallons, so at E10, the market potential for ethanol is over 1.2 billion gallons. Mexico will produce as much ethanol as they can with existing ethanol plants and new builds that are planned in their country, and we believe U.S. ethanol can serve to fill the gap between the total demand and the amount Mexico produces.

Q. Will the foreign market opportunities for ethanol change in 2020? Why or why not?

A. Many countries around the world are starting to see the benefits ethanol can provide in terms of greenhouse gas (GHG) reductions, vehicle emissions reductions and foreign expenditure savings. We recently held our Global Ethanol Summit, bringing together more than 400 government and industry attendees from 60 countries to learn about these benefits. Many direct connections were made with U.S. exporters at this event, which led to onsite sales and set opportunities for future sales. The Council will build off of this momentum to increase global ethanol trade, providing enhanced opportunities in 2020 and beyond for U.S. exports.

Q. What is the outlook for tariffs and trade issues with Brazil and China?

A. We hope to see improved opportunities in both Brazil and China going forward. Brazil has a tariff rate quota (TRQ) in place, which hasn’t served to limit exports to a large extent, but it has increased the price paid in Brazil for U.S. ethanol. We want the Brazilian government to repeal their TRQ and allow duty-free imports of U.S. ethanol, which is the same treatment given to Brazilian ethanol imported into the U.S.

Switching to China, we are optimistic that a deal can be reached with them and that they will begin importing U.S. ethanol once again. We are hopeful the two sides are able to come to an agreement in the near future.

Monte Shaw
Executive Director
Iowa Renewable Fuels Association

Q. How has the idling and closing of ethanol plants as a result of low margins affected the market and demand for ethanol in Iowa?

A. It’s important to remember how rare it is for ethanol plants to be forced to shut down in the heart of corn country. We’re in an extreme situation and it’s made all the more frustrating because it is a man-made calamity. It’s also important to remember that most plants are operating, even if at a loss. So the impact on demand for ethanol in Iowa is minimal. Iowa only consumes about 135 million gallons of ethanol and we produce over 4 billion gallons. The real pain has been for the communities where plants have idled or cut back production. Hundreds of jobs have been put in jeopardy, thousands of small-town investors are concerned, and thousands more farmers lost out on a valuable local market for corn just as harvest was starting. The last two years have been particularly frustrating, not just because of the negative margins and policy challenges, but also because the reverse should be true. The RFS should be driving adoption of E15 and higher blends, thereby driving demand and corn grind. The same should be true for exports, particularly to China. So to me, it’s not just what we’ve lost, it’s what we haven’t gained.

Having said all of that, I am privileged to work for companies that are not afraid to take on challenges—they’re working to take market share from the world’s most profitable and powerful industry, after all. Often, when my frustration boils over, it’s IRFA’s members who set the example. They just keep putting one foot in front of the other. Just keep working. Never give up. We have a better product and with the determination of the people in the ethanol industry, I’m still very optimistic we will win in the end.

Q. How did the 2019 corn crop affect operations, and what is the outlook for 2020?

A. While 2019 was clearly one of the most challenging years in a while for farmers, at the end of the day, farmers do what they always do and that’s produce. As I write this, we don’t know the final numbers on the 2019 harvest but most folks I’ve talked to are pleasantly surprised. My understanding from plants is that the new crop quality is good, and some are even seeing increased corn oil output compared to old crop corn. But as tough as it was in Iowa, we’re much better off than some areas in the eastern Corn Belt or even South Dakota. I think the lack of production in those areas has already had a negative impact on ethanol producers there and we expect that to continue throughout 2020.

And that puts pressure on all plants, but you’d much rather have a plant in Iowa than Indiana right now. I get no pleasure in saying that, it’s just a fact. My heart goes out to those farmers and ethanol folks.

Q. What policy issues have you been following in 2019, and what will the big battles be for the ethanol industry in 2020?

A. Small refinery exemptions from the RFS are by far and away the biggest policy concern of 2019 for the ethanol industry. SREs have destroyed over 4 billion gallons of biofuels demand. Renewable identification number (RIN) prices and ethanol prices have both fallen. It is important that EPA start accounting for SREs based on the number of actual SREs granted in the past, not U.S. Department of Energy recommendations like the supplemental rule proposes, which have regularly been about half of the amount actually granted. We will have our eye on this going into 2020 to ensure waived gallons are properly accounted for and demand destruction is avoided. A real test case for EPA will be how they adjudicate the 2019 compliance year SRE requests in the spring and summer of 2020.

Trade is another big issue for the ethanol industry going into 2020. If a trade agreement is worked out with China, that could open up a 1 billion-gallon market for U.S. ethanol. Mexico is also looking at bringing more ethanol into their fuel supply, increasing the importance of USMCA for ethanol producers.

While the outcome of the SRE debate is the bellwether, there is a long list of other issues to watch in 2020. Will EPA finally begin approving more pathway requests for corn kernel fiber? How will EPA handle the RFS reset rule? Will the U.S. Department of Agriculture roll out a meaningful E15 infrastructure program that works? Will EPA follow through on Trump’s commitment to remove E15 regulatory barriers? Will Congress restore the cellulosic and biodiesel tax credits? This is just a start.

Q. Are you in favor of a high-octane rule? Why or why not?

A. The IRFA board has discussed the notion of a low-carbon octane standard in great detail. To be clear, this is as a next step beyond the RFS, not a replacement for the RFS. There was board consensus to continue to engage in the discussion based on the following four principals: IRFA supports the introduction of low-carbon octane standard legislation; IRFA wants all major biofuel/corn groups behind the bill; IRFA wants a low-carbon metric in the bill; IRFA wants a low-carbon metric that will not leave any ethanol plant out of the system (this does not mean all would necessarily benefit the same).

This concept provides the opportunity to bridge biofuels into a low-carbon energy future. But many challenges remain. First, Congress isn’t getting anything done right now and this would take a law to enact. Second, as nutty as it sounds, some environmental groups don’t want to make liquid fuels better. They want to put all their eggs in electric cars. We need to continue working with environmental groups that understand that in order to reduce carbon emissions from the transportation sector within the next two decades, you must decarbonize liquid fuels. Electric cars just won’t have the penetration needed to do it alone over the next two decades, which is the time frame in which the climate scientists say meaningful action must be taken.

Q. What technology opportunities do you see being important in the year ahead?

A. One thing I always say is that IRFA does everything it can for the biofuels industry except the business of the industry. We don’t tell plants when to buy corn. Or when to sell ethanol. Or what technology is a good investment. That’s not our job nor our strength.

But it’s clear that the technological improvements for ethanol production are just beginning. One technology we hear a lot about from our members is the ability to allow dry-mill ethanol plants to convert corn kernel fiber into cellulosic ethanol. That is being held up by the EPA right now, but there’s great excitement for it. Also, dry-mill ethanol plants will continue to look at new ways to lower their carbon scores and add value to existing coproducts. Therefore, technologies that help plants improve efficiency and create new or more valuable coproducts will continue to be important in the coming years. We see lots of activity in various energy efficiency and in-house energy and electricity generation. We also see many folks looking at options for a higher protein distillers grains.

Q. What progress in expanding E15 markets do you see for 2020?

A. U.S. drivers have trusted E15 to power over 11 billion miles and counting. With year-round sales finally approved, we saw a 46 percent increase in E15 sales nationwide in summer 2019 compared to 2018. We expect that trend to continue as more and more consumers learn that E15 has the greatest market value of any fuel out there today, with higher octane at a lower cost. Currently offered at over 2,000 stations across the country, that number will only grow in 2020. Another USDA infrastructure effort could really provide a boost. But the biggest boost would come from a restored RFS where 15 billion gallons really needed to be blended. That would crack through the petroleum-created E10 blend wall and benefit ethanol producers and consumers alike.

Q. Will the foreign market opportunities for ethanol change in 2020? Why or why not?

A. We are hopeful that an agreement is worked out with China to reopen that market for U.S. ethanol producers. That would be a meaningful demand boost. We also expect the market in Mexico to grow as retailers expand E10 use. IRFA was proud to help host some of the largest Mexican retailers this summer so they could talk with U.S. retailers about the success of E10 here. The speed of adoption there will have a lot to do with how quickly the necessary blending infrastructure can be put in place. It would be good if Brazil would end their unreasonable tariff on U.S. ethanol as well.

But there are literally dozens of other markets that, combined, will be just as important. IRFA is a member of the U.S. Grains Council and will do whatever we can to assist them in achieving their goal to grow U.S. ethanol exports to 4 billion gallons.

Author: Lisa Gibson
Editor, Ethanol Producer Magazine