Trade tensions, oversupply, and SREs drive biofuel plant shutdowns

Trade tensions, the Trump administration's decisions on biofuel policy, and an oversupply of ethanol are placing ethanol plants in a tight spot financially, forcing some to either shut down or press pause on production until conditions improve, industry officials say.

Some 17 of the more than 200 ethanol plants across the country have idled production or closed permanently over the past 12 months, according to the Renewable Fuels Association. 

Industry giant POET recently announced it would idle production at its facility in Cloverdale, Ind., for several weeks. “The result is pain for Midwest farmers and the reduction of hundreds of jobs and hundreds of millions of dollars of economic activity across Indiana,” said POET President and Chief Operating Officer Jeff Lautt.

The company has reduced production at half of its biorefineries, with the highest drops being seen in Iowa and Ohio. Jobs at POET’s 28 biorefineries are expected to be affected, and the production cut will reduce POET's corn usage by about 100 million bushels across Iowa, Ohio, Michigan, Indiana, Minnesota, South Dakota, and Missouri. 

“POET made strategic decisions to support President Trump’s goal of boosting the farm economy,” Lautt said. “However, these goals are contradicted by bailouts to oil companies."

According to an Energy Information Administration report released in August, margins at corn-based ethanol plants were near zero in June and July. Operating margins averaged 3.5 cents per gallon through the first half of 2019.

RFA Chief Economist Scott Richman says that the Renewable Fuel Standard exemptions given to small oil refineries for 2016 and 2017 have been a factor in the industry slowdown.

In 2016, the Environmental Protection Agency granted 19 of 20 requested small refinery exemptions to oil refineries and 35 out of 37 for the 2017 compliance year. Of those two years combined, oil refiners were exempt from blending 2.6 billion gallons of ethanol.

Oil refineries must blend a certain amount of ethanol into the fuel supply. The RFS requires 15 billion gallons of conventional corn ethanol is blended into the fuel supply each year. If the refiner is unable to blend their required amount, they may request an economic hardship waiver.

On August 9, EPA granted 31 small refinery exemptions out of 40 requested petitions, exempting another 1.4 billion gallons.

The latest waivers infuriated biofuel-state lawmakers and other industry backers.

“They screwed us,” Sen. Chuck Grassley, R-Iowa, told Iowa Public Television during an August interview. “Not only is the government not keeping its word but it’s also in a sense screwing the farmer when we already have low prices for grain.”

But those low prices could change pretty quickly, as the National Chicken Council pointed out in their comments last month to EPA about 2020 RFS volumes.

Given the current uncertainty regarding the 2019/2020 crop year corn supply, NCC said that the proposed volume for 2020, coupled with the recent waiver that will increase the use of E15, is overly aggressive, overly reliant on corn-based ethanol, and will likely cause disruptions to the nation’s feed supply.

Iowa Democratic Reps. Cindy Axne and Abby Finkenauer have called for investigations into how EPA handles the biofuel waiver process but EPA didn’t stop short of defending its actions.

“There is zero evidence that EPA’s congressionally mandated small refinery exemption program, which provides regulatory relief to small refineries around the country, has had any negative impact on domestic corn ethanol producers,” an EPA spokesperson said. “In fact, the Trump Administration has overseen year-over-year increases in domestic fuel ethanol production, to the highest level in history and the United States exported a record volume of ethanol in 2018 for the second consecutive year.”

The U.S. industry is pressuring the Trump administration to offset the impact of the RFS exemptions that have been given to refiners. Agriculture Secretary Sonny Perdue said in August that Trump will announce changes to how the government issues biofuel mandate waivers to small refineries, but the administration has run into opposition from biofuel groups on its proposals thus far. 

Richman added the industry has seen additional challenges with domestic consumption, exports, and increased production capacity. Some new plants came online in anticipation of market growth.

Iowa, the nation’s top ethanol-producing state, saw operating margins fall as corn prices increased 15% from an average of $3.57 in May to $4.20 per bushel in June — the highest price since June 2016. Potential lower harvest yields and Midwest flooding in the spring drove up the price, according to EIA.

Slower domestic and global growth also has kept ethanol prices low. Prices in Iowa averaged $1.28 per gallon the first six months of 2019, 10 cents lower than the same period in 2018, EIA reported. 

“When you combine those factors and throw in the nuttiness that’s happened in the corn market early this summer, it’s created some difficulties,” Richman said.

Speaking to attendees at the 32^nd annual American Coalition for Ethanol Conference in Omaha last month, Ron Lamberty, senior vice president of ACE said some of the biggest gains made in the history of the U.S. ethanol industry have occurred when prices were relatively low. 

“This time around, however, with domestic markets barricaded by EPA policy and oil company contract language, low U.S. ethanol prices caught the attention of marketers in other parts of the world and more ethanol was exported from the U.S. than ever before,” Lamberty said.

Still, Richman said the trade tensions with China have contributed to the U.S. oversupply. “A few years ago, China was one of our largest export markets and took 200 million gallons of ethanol in one year,” he said. “They are moving to E10 blending and it’s been a great market in the past for ethanol and distillers’ grains.” 

University of Illinois economist Scott Irwin disagrees with industry arguments that the SREs have reduced ethanol demand. “I believe the ethanol industry overbuilt its production capacity between 2014 and 2018,” Irwin told Agri-Pulse. 

He said all but 100 million gallons of ethanol in the United States is used in the form of E10, and SREs haven't affected E10 usage. The blending rate has held steady at 10.1%

He said the sector taking the hardest hit from the waivers is biodiesel. “There’s gallon for gallon decline in overall biofuel demand from SREs but because of the quirks in the RFS, it’s biodiesel that is bearing the burden of demand destruction, not ethanol,” Irwin said. “The damage from SREs is largely falling on biodiesel even though all of the screaming you hear in Washington, D.C. is from the ethanol side.”

Biodiesel producers say their industry is hurting, too.

“There’s no doubt across the board, plants are running at reduced capacity,” said Kurt Kovarik, vice president of federal affairs at the National Biodiesel Board (NBB). A major producer of biodiesel and renewable diesel, World Energy, announced last month that it was closing three of its plants in the wake of the new waivers being issued.

The company said it would maintain essential staffing at these plants “to keep the plants in a warm shutdown mode pending improved market conditions.”

Kovarik added when plants idle back production or shutdown, that has a ripple effect on the rest of the market.

“They’re not utilizing the investment they made to the full extent. They are not buying feedstock, which is soybean oil and ultimately they’re not getting the cleaner burning fuel into the marketplace that consumers want,” Kovarik said.

For more news, go to www.Agri-Pulse.com.