USA: Down the Line - 2017 Ethanol Industry Outlook

 09.01.2017 10:43:30

USA: Down the Line - 2017 Ethanol Industry Outlook

The ethanol industry is on solid footing as it looks at the year ahead. Ethanol Producer Magazine speaks to four executives about the bright spots, challenges and significant changes in the world of ethanol in the January 2017 print edition.
By Ann Bailey | December 28, 2016

On bright spots for the ethanol industry: 

We have an industry that can grow. Whether it's from corn-starch or cellulosic feedstock, we have opportunities and a market that needs our fuel. It may be incremental growth with regulatory limits or it could just explode, and that would be a good explosion. We all are ready to do big things. The corn supply absolutely has been increasing. We've had huge corn crops the past three to four years and, although we're always at risk for the next drought, with big corn crops comes cheap corn that needs new markets. We can provide that market.

The other big opportunity, of course, is exports. The U.S. has found a wonderful synergy with 10 percent ethanol in all automotive gasoline. The world needs that same high-octane, clean-burning fuel component and it's learning that. Our exports have been growing every year, and I think that's going to continue. World trade is going to be key to our opportunities.

On cellulosic ethanol and new technology:
We're on the edge of our seats. We all are recognizing the technology is closer and plants have been built. But are those plants cash flowing? The stalking horse bid from Shell for the Abengoa plant in Kansas was something like 5 cents on the dollar. That is a hemorrhage. We all watch Abengoa suffer and it sets us all back. But then there's the Quad County technology model. We as corn-starch ethanol plants can see a bolt-on technology that's not a factor of $4 or $8 capital cost per gallon produced, but a fraction of that where you can increase capacity by 5 percent or 10 percent from the cellulosic fraction in the corn kernel fiber. We all recognize a good opportunity and we're all looking at technology tweaking to get us there. However, it's not going to be "Oh, my gosh, we've got to spend half a billion dollars to build a plant." We're not going to do that. But we can all see spending 20 percent of our capital on a bolt-on technology.

When the government promises you a cellulosic RIN [renewable identification number] that's an extra dollar or whatever, that sounds good, but is it real? My conservative farmer ownership doesn't want to invest in projects with government-controlled product prices. They want [investments] to be compatible, comparable to do what they do with nongovernment regulated products.

The price for cellulosic ethanol has to come down some, but it's close. It's really close. There are technologies and enzymes and yeast and processing equipment that are real, that people are actually installing and trying. The old storyline for me was "15 years ago cellulosic is five years away and 15 years later, it's still five years away." I don't think it's five years away now. I think the technology is being implemented right now.

On significant changes:
The wonderful part is diversification. When I was in the business 20 to 30 years ago, ADM, where I worked at the time, saw the industry being 10 big plants. All the size of ADM plants, they would absorb all of the necessary production increases needed to supply 10 percent of the gasoline market as ethanol. Instead, 200 plants were built more like the size of mine. Not the huge plants from multinational corporations, but farmers building co-ops and plants out in a corn field. That was a wonderful opportunity for me, personally, and for farmers, in general. The industry has grown that way-organically. But the consolidation of the industry that you've seen in the past 10 years with multiple plant businesses and oil company-owned multiplant businesses, is a little disconcerting. The farmer-owned business model has to compete with that now, but then it always has. The first risky ventures were the smaller plants, farmer-owned cooperatives, but it's still an industry that is diverse in the types of businesses and the ownerships and sizes. A small plant like ours still can compete.

Mike Irmen
President, The Andersons Ethanol Group.
The ethanol group at The Andersons Inc. is one of five business units of the publicly traded company headquartered in Ohio. Its four plants have a combined capacity of 330 MMgy, with an expansion underway at the Albion, Michigan, facility from 55 MMgy to 110 MMgy. The Michigan plant and the company's 55 MMgy Denison, Iowa, plant are adjacent to commercial grain elevators. The other two plants each have capacities of 110 MMgy: The Andersons Clymers Ethanol, Logansport, Indiana, and The Andersons Marathon Ethanol in Greenville, Ohio.

On bright spots for the industry:
There are quite a few. We have been involved in this business for 10 years now and we've learned much about gaining efficiencies in the business. It never ceases to amaze me that we think we've leaped a major hurdle, whether it's in terms of better efficiencies in production, yields per bushel of corn we process or higher values for coproducts, and more improvements just keep coming. There's no shortage of vendors out there who are doing research and development for us. They continue to bring us to the next level with new bells and whistles. We're committed to producing fuel ethanol, but there are multiple other uses for these plants to produce other products and coproducts to enhance our ability to show returns to our investors on a long-term basis.

On challenges ahead:
An ongoing challenge is the industry has grown so quickly that we have the capacity to produce more fuel ethanol than we can blend domestically at 10 percent. We are finding other ways to get around that like increasing exports and pushing for infrastructure build-out. That will give consumers a choice at the pump, allowing us to blend beyond that 10 percent "wall" with the help of the RFS. The renewable fuels standard is obviously very important to us, but ethanol demand would not go away without it. However, the infrastructure development to level the playing field would likely slow down. At the end of this month (November), we expect to see the renewable volume obligations for 2017 and, frankly, they're getting up near the maximum mandate for corn-starch ethanol. The proposed rule was 14.8 billion gallons. We think the industry has made a very good argument that it should go to the mandated amount, not waiving it to 14.8, but going right to 15 billion gallons. If I were going to predict today (Nov. 17), I would guess that is where the RVO is going to come out for a couple reasons. One of them is that we have surpassed the blend wall. For the past couple months, we've had weekly data that shows we're blending beyond 10 percent at 10.3 to 10.4 percent of all gasoline sold. We are continuing to add blender pumps to sell E15 and E85 blends that allow us to get past the blend wall. Gasoline demand is stronger than it has been the past couple years and blending 15 billion gallons of corn ethanol really shouldn't be any issue in coming years. On top of that, we have a significant RIN carryover. It's arguably between 1.5 and 2 billion RINS carried over. Even if the industry should not quite be able to blend 15 billion gallons in 2017, there should be plenty of RIN inventory out there for refiners to buy RINS to cover their obligations that way.

On cellulosic ethanol and new technology:
We're seeing very slow progress in terms of advanced ethanol. Let's talk about cellulosic for a minute. Multiple plants have been on the horizon. Mass production of cellulosic ethanol has been five years away for about 25 years now and I expect that to continue. The problem with expecting a quicker uptake of cellulosic technology is that it will never be price competitive without subsidies and produce ethanol on an even scale with a feedstock that is as efficient as corn is.

With corn, we just change starch to sugar and ferment it into alcohol. There are multiple steps in cellulosic and the cost to producing cellulosic ethanol, including the significant capital costs up front, is something on the multiple of four or five times of using a corn feedstock. It's going to have to forever be subsidized, which I would hate to see, or it's going to have a very difficult time standing on its own two feet.

I think there have been six to eight different cellulosic projects that have had grand openings, but I don't think any of them are running near their advertised nameplate capacity. Finding the additional capital it will take to get cellulosic ethanol caught up to anywhere near where corn ethanol is has been is a tough row to hoe. The RFS also allows waivers for cellulosic so they won't require cellulosic ethanol to be used that isn't being produced. The way they determine the waiver on that mandated quantity is they do their best to poll the industry about what they expect to be able to produce in the following calendar year and make the mandate something that is reasonably close to expectations so as not to force the industry to buy RINS on a product that doesn't exist. This practice isn't forcing a higher RIN value that would further encourage a deeper investment in cellulosic technology.

On exports:
This year I think we will finish close to a billion gallons. South American production is down due to high sugar prices, so we kind of have the ethanol export business to ourselves, including Brazil as a customer. Between now and seven or eight years out, I expect the potential for ethanol exports to get up near 1.5 to 1.6 billion gallons per year. As I mentioned earlier, I think we are breaking through the blend wall and I expect that to continue. In 2017, we will break through it on an annual average and I expect by the time we get out to 2021, 2022, we could have as much as 2 billion gallons of additional demand for ethanol, just due to higher blends such as E15, E30 or E85.

Mark Borer
Senior Vice President and General Manager, Poet Plant Management.
Headquartered in Sioux Falls, South Dakota, Poet LLC manages 27 corn-ethanol plants in seven states with a combined capacity of 1.7 billion gallons, plus the Poet-DSM cellulosic ethanol facility at Emmetsburg, Iowa. With the exception of its wholly owned research facility at Scotland, South Dakota, the Poet network of corn-ethanol plants each have a large number of local investors. Poet provides turnkey development, design, engineering, construction, management and marketing for its network of plants.

On challenges facing the industry:
I think we would be naïve to think the oil industry is not going to continue to try and limit the access the consumer has to biofuels by limiting infrastructure expansion and by attacking the renewable fuels standard in Washington D.C. That's a challenge that remains, and we're confident that is going to continue in the future. The good news is our product does good things in terms of price at the pump, in terms of performance in the fuel supply. At the end of the day, we think that's going to win out. The consumers are savvy enough that they're going to access those benefits, so we're focused on trying to do what we can do to support the renewable fuels standard in Washington and also to help build that infrastructure, help facilitate that.

On cellulosic ethanol and new technology:
There's no question we're closer (with cellulosic). Poet's large project where we are commercializing cellulosic ethanol -Project Liberty in Emmetsburg, Iowa-presented challenges. Any development of new, revolutionary technology always does, but we're continuing to work through those technical challenges. We're at a point now where we're getting an operational plant that's going to be producing in 2017. We're excited about the gallons we think we'll be producing there and the fact that we're proving out. It is a very real, very vital commercial operation that's got a strong future.

On significant changes:
It's really about continuous improvement. The plants continue to get better: more productive, more efficient, less energy consumption while producing ethanol. We see that continuing with new products being developed, new technologies. The industry is still firmly in the growth stage of its life cycle. There's a lot of opportunity, a lot of upside for us, which will, again, translate into the price for ethanol and the number of products we're able to deliver. There's challenges, there's work. When you think about biofuels, there are a lot of different products out there. There's a tremendous corn crop out there-too much corn, once again. Our farmers and agriculture are going to be faced with a potential crisis if we don't do something. Ultimately, what that is, is they've got to have more of the corn going into fuels, to provide an option for consumption of corn that they continue to produce. It's a very bright future. We're firmly committed to it.

Tom Willis
CEO, Conestoga Energy Partners.
Conestoga Energy Partners operates three plants: 110 MMgy Arkalon Ethanol in Liberal, Kansas; 55 MMgy Bonanza BioEnergy in Garden City, Kansas, and 40 MMgy Diamond Ethanol in Levelland, Texas.

On bright spots in the ethanol industry:
We have a brisk export program and I think that is helping to get rid of some of the surplus alcohol. I think, No. 2, we have reasonably low gas prices encouraging people to drive more, so that's positive for us. Third, we've had a good corn crop, and in our area, good corn and sorghum crops that have given us ample feedstock. Those would be the biggest reasons for optimism. We've got good demand, or what appears to be, good, solid demand and we've got reasonably cheap feedstock. I certainly see it being the case going through second quarter. I don't know what next year will bring, but beyond the first two quarters of 2017 you get into "Did the new-crop get into the ground okay?" and all those other issues. It appears as though, through things like the Prime the Pump, this industry is not sitting back and waiting for the government to do everything. We're doing things ourselves to drive demand of higher blends of ethanol at major convenience stores.

On exports the year ahead:
Assuming that oil doesn't fall out of bed, I look for exports to continue to grow over a billion gallons or higher, maybe 1.2 billion. It looks like every year we add new customers. China bought ethanol from us this year. India is ready to buy ethanol from us. The traditional market in Brazil, with world sugar prices high like they are, continues to be a destination for us. I am optimistic about exports as we continue to add new destinations.

On significant changes:
The No. 1 change has been growth in demand for our product, because it was easy to see that we were growing faster than there was demand for it. I think that's one good thing. I think exports of our product have been another good thing. The American farmer has risen to the challenge and the old argument that once was used that it was food versus fuel has proven to be a huge fallacy. The American farmer can produce enough for us to be able to produce both and I think more people see that. More see through the mistruths that were put out there 10 years ago. There's no doubt technology has gotten more efficient so we're able to create more ethanol out of the same amount of feedstock. We're able to do with less power, less energy all together, so we're probably a little easier on the environment now than what we had been doing.

Author: Ann Bailey
Associate Editor, Ethanol Producer Magazine
abailey@bbiinternational.com
701-738-4976

Note: the interviews have been edited for length and clarity.