The EPA Ethanol Review Won’t Kill Corn Demand (At Least Not This Decade)

The Trump administration promised during the 2016 campaign to not adjust any ethanol standards during his term. Then, he became friends with a hedge fund manager who happened to own a network of refineries.

Established in 2005, the Renewable Fuel Standard (RFS) evolved into a key economic factor after it was expanded in 2007 to require oil producers to blend renewable fuels into all transportation fuels.

Corn-based ethanol has been a cornerstone of the American energy system since.

This year, there have been two high-profile debates. First came around the decision to set the maximum blend to 15 billion gallons for the second straight year. The second has been the recent change at the EPA review that will alter the way that renewable standards are counted.

Ethanol has evolved into a political football that has missed the greater point about corn’s current role in the U.S. energy supply. More important, producers should be less concerned about any changes to the mandate and more interested in how they can benefit from the latest announcement that will increase global ethanol demand.

Ethanol Offers Great Bang for Cheap Buck

 

Back in 2005, the RFS standard helped get the ethanol industry off the ground. Naturally, the energy companies didn’t like the fact that they weren’t able to sell 10% of their product. They argued that ethanol shouldn’t be subsidized and that it should survive on its own.

Corn production would ramp up because of the standard. Additional acres were farmed to guarantee revenue and to meet demand. But a decade later, the standard has worked, and as far as standing on their own, many ethanol producers could survive a change to the RFS.

There would be short-term pain for operators who failed to optimize their operations over the last decade. But producers who have dedicated the last 10 years to improving efficiencies and innovating their processes would only benefit from less mandated competition.

When people talk about changes to the ethanol standard, I always resort back to a fascinating interview conducted by Dan Charles at NPR. [1]

Charles interviewed two individuals who have spent years examining the question of what would happen without the RFS standard. Those interviewees were Paul Niznik of energy consultancy Stratas Advisors and University of Illinois economics professor Scott Irwin.

Both had spent a considerable amount of time studying the potential impact of a change to RFS, supply, demand, and the science behind everything.

They’re conclusion: Even without the standard, gasoline producers would continue to blend ethanol into their fuel for one important reason.

Octane.

Charles notes that Octane is the metric of gasoline’s ability to ignite under pressure. With the industry standard of 87 for gasoline, producers need to refine their petroleum with high-octane compounds.

The cheaper the better.

Alkylate and iso-octane are traditionally more expensive than corn-based fuel.

“The truth is,” Niznik told NPR. “the [petroleum] refining folks knew in their hearts that if the [ethanol mandate] went away for a while, ethanol use wouldn’t drop much. They were looking around at the octane replacements, and knew that those [other] things were really expensive.”

There are not many true incentives for dramatic changes in how energy is procured. Ethanol offers the biggest bang for their buck. The mandate is little more than a requirement that people do something that they are already doing.

Refiners naturally remain concerned about the long-term shift in energy consumption in the United States. No doubt, Elon Musk has ambitious goals for electric vehicles, and a shift to natural gas for transportation fleets are on the horizon.

However, barring a significant disruption from an alternative fuel, ethanol production will survive any changes to the RFS standard, as will producers.

They simply need to see that global markets can and will bolster demand.

Which is our final point today.

Will China Join India and Brazil?

 

Ethanol supporters rightfully want to keep the mandate in place to ensure that it provides economic benefits to corn-growing states. However, all the chatter on cutting the standard has been driven around the simple reality that we haven’t seen as much domestic demand for fuel as those who set the policy expected more than a decade ago.

As we noted earlier in October, China’s E10 mandate will provide a significant bump to ethanol demand in the country. With at least two years of reserves (and possibly more depending on the source), China is using ethanol standards to drive down its massive supply of corn.

Some have speculated that the standard will fuel incredible demand for U.S. corn in the future. Given China’s ability to ramp up production, that speculation is more hype and wishful thinking. If anything, U.S. ethanol producers may quickly find a willing buyer if China finds itself falling short of production requirements.

China claims that they want to be self-sufficient and not have to import any corn or ethanol but they’ve said that in the past without following up on it.

The U.S. already exports an incredible amount of ethanol to Brazil (which has a RFS) and India, which recently increased its blending to 5%. It’s possible that we will see India adopt its own standard in the next few years.

american-ethanol-exports-brazil-now-china-next
Will the US being able to pursue ethanol exports to China like they have Brazil?

 

That said, U.S. ethanol producers argue that we need to create demand for the product. That is true, particularly at a time that corn prices remain low.

Foreign markets will provide that demand. As additional countries look to cut emissions around the globe – particularly in the wake of the Paris Climate Agreement – there is little reason why ethanol exports can’t continue to rise and fulfill international demand.

Accordingly, the benefit for American corn producers may not that be China wants US corn, but US ethanol. This would intuitively increase corn-for-ethanol demand.

Currently, the USDA is forecasting that nearly 5.5 billion bushels of corn will be required to satisfy American biofuels demand in 2017/18. How that would translate to additional demand required to meet Chinese ethanol’s targets?

We know that a bushel of corn can produce about 3 gallons of ethanol. If Chinese ethanol import demand gets even above the 200 million gallons, this would suggest at least 60 million bushels in additional corn demand in the US.

That’s not a lot.

To move the needle more, we’d need to see China importing closer to 1 billion gallons to help move the needle effectively enough.

Otherwise, acres in America may continue to sway towards soybeans, which will eventually find their way to China.

About the Author
Garrett Baldwin

Garrett Baldwin is a content strategist and editor at FarmLead. He covers the global grain markets and public policy issues related to the agricultural industry. He is a graduate of the Medill School of Journalism at Northwestern University. He also holds a Master’s Degree in Economic Policy from The Johns Hopkins University, an MS in Agricultural Economics from Purdue University, and an MBA in Finance from Indiana University.

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