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Future development and expansion of the biofuels industry, particularly the ethanol industry, could be in trouble, if Congress and the U.S. Environmental Protection Agency continue to delay ethanol blends beyond the current maximum of 10 percent in the United States.
At least that is the opinion of Robert Wisner, economist from Iowa State University, and other economists around the country. The United States is quickly approaching the "E-10 blend wall", which is the point at which ethanol production exceeds ethanol demand at the maximum 10 percent ethanol blend rate.
Even with the current oil disaster in the Gulf region, the federal government has not seemed to alter their position relative to increasing the maximum rate 10 percent for blending ethanol in gasoline.
Late in 2009, the EPA announced that it would delay a final decision on raising the legal maximum "ethanol blend wall" above the current 10 percent, until sometime in 2010, possibly as early as this summer. The hope by many groups that support further growth and expansion of the ethanol industry is that the maximum ethanol blend rate will be increased to a 15 percent maximum. However, the EPA may decide to use a "phased-in" approach that initially raises the maximum blend rate to 12 percent, and then gradually increases the blend rate to 15 percent.
Minnesota, which has had a 10 percent mandated ethanol blend for several years, increased that percentage to 20 percent a couple of years ago; however, increases in the Minnesota ethanol blend percentage cannot be achieved until the EPA adjusts the federal maximum allowable level for ethanol blends. Several other states are in a similar position.
Many groups and organizations continue to oppose an increase in the maximum ethanol blend rate by the EPA, including the auto makers, grocers association, environmental groups and some livestock organizations. Concerns have been raised about the impacts of a 15 percent ethanol blend on the performance of some types of gasoline engines, on food prices, on livestock feed costs and on the global environmental impact.
As a result of these concerns, it is possible that the EPA could place restrictions on the year of vehicles (such as 2001 or newer) and the types of gasoline engines that are impacted by the potential increase in the ethanol blend percentage. Small engines for boats, lawnmowers, etc., may be exempted from the increase.
Ethanol growth in the last decade
One of the biggest trends that occurred in the first decade of the new century (2000-09) was the rapid growth in the production and utilization of ethanol and other biofuels, which has affected the agriculture industry, rural communities and the public's fuel consumption trends. In 1999, total ethanol production in the United States was 1.4 billion gallons per year, which rose to 3.9 billion gallons per year by 2005, 6.5 billion gallons per year by 2007, an estimated 10.6 billion gallons in 2009, and likely over 12.5 billion gallons in 2010.
At the start of 2000, there were only 54 ethanol plants, many of them quite small, operating across the United States, as compared to the nearly 200 ethanol plants in 26 states today, many of them producing 50 million to 100 million gallons, or more, per year.
According to figures from the U.S. Energy Information Administration, total U.S. ethanol production in March was approximately 1.1 billion gallons, which is an increase of over 20 percent, compared to a year earlier.
In 2009, approximately 80 percent of the motor fuel sold in the United States contains some type of ethanol blend. The utilization of ethanol has helped reduce the need for oil imports from the Organization of the Petroleum Exporting Countries and other nations by more than 300 million barrels per year. There are approximately 7 million "flex-fuel" vehicles in use in the United States, compared to virtually none a decade ago. One of the challenges with the "flex-fuel" vehicles is having adequate access to E-85 fuel and other higher blends of ethanol fuel. Currently, only abut 2 percent of the nation's 120,000 retail fuel outlets offer E-85.
Based on recent U.S. Department of Agriculture reports, it is estimated that the U.S. ethanol industry will utilize just under 4.3 billion bushels of corn in 2009-10. This compares to 3.7 billion bushels in 2008-09, and is up from 1.3 billion bushels of corn used for ethanol production in 2004-05.
The USDA estimates that the United States will utilize a total of 13.1 billion bushels of corn in 2009-10, including 5.5 billion bushels for feed, 2.1 billion bushels for exports and 1.2 billion bushels for other processing, in addition to the 4.3 billion bushels for ethanol production. Corn usage for producing ethanol is expected to increase to 4.65 billion bushels in the 2010-11 year.
The USDA has estimated total U.S. corn production for 2009 at a record level of 13.2 billion bushels; and it appears likely that total U.S. corn production in 2010 should again be above 13 billion bushels.
Corn producers in the Midwest have benefited from the increased corn usage for ethanol production. The yearly national average corn price was well below $3 per bushel as recently as 2005-06; however, since that time, major increases in U.S. ethanol production have helped the average corn price to be above $4 per bushel for 2007-08 and 2008-09. The USDA is projecting a national average corn price of near $3.50 per bushel for 2009-10 (Sept. 1 to Aug. 31). Prices have been somewhat lower than that level in recent months.
Another big benefit for corn producers in many parts of the Midwest from added demand for corn by local ethanol plants has been an improvement in the corn "basis," which is the difference between the local cash price for corn and the offsetting corn futures price on the Chicago Board of Trade. Producers have also benefited from reduced transportation costs for corn marketing, by being able to deliver corn to local ethanol plants, rather than hauling greater distances to the river grain terminals.
The higher corn prices in recent years have not been welcomed by all sectors of production agriculture. The tighter corn supplies and resulting higher corn prices have greatly increased feed costs for livestock producers, which along with other market factors, lead to highly negative profit margins during most of 2008 and 2009 for swine, beef and dairy producers. It should be noted that in addition to producing over half of the world's ethanol, today's U.S. ethanol industry produces approximately 28 million tons of dried distillers grains, which is a high-quality livestock feed source, and helps offset feed demand from corn and soybean meal.
According to data from the Renewable Fuels Association, the U.S. ethanol industry supports almost one-half million jobs nationally, and contributes to over $21 billion annually in federal, state and local tax revenues. The U.S. ethanol industry has made vast improvement in efficiency in the past decade. Today's corn-based ethanol production uses 26 percent less water, consumes 20 percent less electricity and 15 percent less energy overall to produce a gallon of ethanol, as compared to ethanol production as recently as five years ago.
Ethanol policy trends
The future of the ethanol industry, and other biofuels, is as likely to be decided in the halls of Congress, the offices of the EPA and the nation's courts, as it is through future research and technology. Congress created the Renewable Fuel Standards with passage of the Energy Policy Act of 2005, which was further enhanced by the 2007 Energy Independence and Security Act. Current RFS regulations required 9 billion gallons of renewable fuel to be used in the United States by 2008, which was achieved, then increasing to 15 billion gallons of renewable fuel usage in 2012, and 36 billion gallons by 2022, of which a significant portion must be produced from cellulosic sources and biomass.
Those renewable energy targets may have to be lowered in the next few years, if the EPA has further delays beyond 2010, for increasing the ethanol blending rates above the current 10 percent maximum. Further delays by the EPA may also slow the advancement of the development of cellulosic ethanol, and other advanced biofuels.
Several months ago, the EPA released final rules for the revised renewable fuel standards (RFS2), which will become effective July 1. The revised EPA regulations included potential mixed results for the future of corn-based ethanol. The EPA regulations stated that corn-based ethanol provides a 21-percent advantage in reduction of greenhouse gases, compared to conventional gasoline, which is above the 20-percent threshold set by the EPA. This means that corn-based ethanol produced at both existing and new ethanol plants will qualify for the revised RFS2 standards, and could help aid the EPA decision to increase the allowable ethanol blend percentage above the current 10 percent maximum.
The RFS2 released by the EPA calls for 12.95 billion gallons of biofuels to be produced this year, which would be an increase of 17 percent from 2009. It also lowered the mandated requirement for the production cellulosic biofuels to 6.5 million gallons in 2010, from the original mandate of 100 million gallons. The reduction is being implemented to allow more time for research and development of cellulosic ethanol. It also calls for 1.15 billion gallons of biodiesel production as part of the mix; however, the U.S. biodiesel industry has been facing severe economic challenges in recent months. The $1 per gallon federal biodiesel blenders credit for the production of biodiesel expired at the end of 2009, and Congress has been slow to enact legislation to extend the blenders credit. Without the credit, it is nearly impossible to achieve positive profit margins for biodiesel production.
There was one concern for corn-based ethanol in the EPA RFS2 report that was released, in that "indirect land use change" caused by the corn-based ethanol will continue to be considered in the calculation of greenhouse gas emissions by the EPA. The theory behind ILUC is that as more corn acres in the United States are used to produce ethanol, more environmentally sensitive acres will be converted to food production acres in Third World countries, thus increasing the likelihood of global warming. This theory has been questioned by many scientists, and does not fully account for corn yield advancements in the United States and improved technology in ethanol production.
It is estimated that without the inclusion of ILUC by the EPA, corn-based ethanol would have a 52-percent advantage over conventional gasoline in regards to producing greenhouse gases.
Interestingly, the EPA does not account for ILUC when calculating greenhouse gas emissions from traditional fossil-based fuels.
California has implemented a stringent, and controversial, low-carbon fuel standard, which is aimed at reducing greenhouse gases. The California regulation relies heavily on the ILUC calculations for corn-based ethanol, which puts it at a distinct disadvantage compared to conventional gasoline. Many feel that the regulations may eliminate corn-based ethanol from being sold in California in the future, which could have a serious economic impact on the ethanol industry in the Midwest.
There is concern that other states on the East Coast may pass legislation similar to the California legislation.
The next issue that may slow development of the renewable fuels industry may be a long court battle over whether or not the recently imposed California regulations have precedence over the EPA regulations or other federal regulations related to biofuels and greenhouse gases. A couple of lawsuits have already been filed.
The science related to ILUC relative to greenhouse gases is limited, which will make objective court decisions difficult.
Interstate commerce issues are also likely to enter into the court considerations. Obviously, the future of the Midwest ethanol industry could be greatly impacted by these court decisions. If California is successful in having state regulations for renewable fuels standards supersede federal regulations, other states may also decide to implement their own renewable fuels standards, which could impede national growth in production of biofuels.
In early May, corn-based ethanol received some positive news, as Purdue University released a report showing that ethanol could be in a better position than previously thought for reducing greenhouse gas emissions. The study reduces the expected greenhouse gas emissions from the future production of corn-based ethanol by about 10 percent, as compared to previous studies. The reason for this adjustment, in contrast to previous studies, is scientific advancements that are likely to increase corn yields in the coming years, without significantly increasing total corn acres or required crop inputs.
It also accounts for efficiency advancements in the production of ethanol. The new study results also lowered the impact of ILUC for corn-based ethanol by 35 percent. It will be interesting if this Purdue study has any impact on future EPA decisions, or on future global warming legislation that is passed by Congress or state legislatures.
Bottomline
We will likely continue to see significant research and development efforts related to the expansion of advanced biofuels, especially cellulosic-produced ethanol. However, large-scale ethanol production from most of these sources is several years away, and corn-based ethanol will likely continue to be our primary source of biofuels in the short-term. Federal government policy and resources will likely dictate how fast the commercial development of advanced biofuels occurs, as well as the future role of corn-based ethanol and soy-based biodiesel in the U.S. energy plan.
In the short-term, increasing the 10-percent maximum ethanol blend percentage in the United States, and restoring the $1 per gallon biodiesel blenders credit, are critical to keeping the U.S. biofuels industry profitable, and competitive in the world fuels market.
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Kent Thiesse is a government farm programs analyst and a vice president at MinnStar Bank in Lake Crystal. He may be reached at (507) 726-2137 or kent.thiesse@minnstarbank.com.
