Goodbye, Ethanol Subsidies
1 March 2012 Six billion dollars in subsidies to US ethanol blenders expired last month. It came and went, like a pro athlete being hit with a speeding ticket en route to signing an endorsement deal worth some ungodly sum.
The industry has been both hand-over-fist profit maker and fallen star, at times as much a victim of boom-and-bust cycles of the broader market as any other. There have been highs – count 2011 as a record year for US exports – and there have been lows (think ballooning production costs, 2008, bankruptcies, VeraSun.) Three decades of government subsidies helped create the machine.
Ethanol makers say they don’t need the payouts. “The industry has now matured to the point that it can survive without the tax credit,” assured Jeff Broin, the founder and CEO of Poet, the world’s largest ethanol producer, in response to the decision. Nor, he announced a few weeks later, would the company need the $105 million loan guarantee promised to it by the Obama administration to build a commercial-scale cellulosic ethanol plant.
Bob Dinneen, head of the Renewable Fuels Association trade group, drove home the point on Jan. 5 in The Hill blog, headlined, “US ethanol makes history by sacrificing a subsidy.”
“There is enough demand and mandate that we will have 15 billion gallons of fuel produced that will replace Saudi or Middle East oil,” adds Fred Clarke, vice president of Arisdyne Systems, a maker of ethanol plant equipment that uses a yield-boosting technology called hydrodynamic cavitation. “At the end of the day, it was not something that really helped the ethanol plants. It’s being claimed by everybody but them.”
EPA’s Renewable Fuel Standard mandates ethanol production until 2022. This year, the US expects to generate 15.2 billion gallons of renewable fuels, up 9% from 2011. Nearly every gallon of gas sold in the US contains the capped 10% blend of ethanol, and output is set to soar to 36 billion gallons by 2022, meaning that either the blend limit, if not exports, should rise in step.
Corn ethanol technologies have improved productivity by half from 15 years ago, generating some 450 gallons per acre, says the RFA. Moreover, the fuel injects $53 billion into the US gross domestic product.
Poet claims that since it began production 26 years ago, it has halved its energy use and cut water use 80%, while yields have increased more than 20%.
Efficiency, as they say, is everything in the energy world. This will become even more evident as more companies segue into the epically slow-moving yet highly touted waters of cellulosic ethanol, made from corn residues and other nonedible feedstocks.
Cellulosic packs far greater energy punch than straight grain ethanol. Unfortunately, the refining process is also nightmarishly expensive. “They’ve had a couple of setbacks,” says Dr. Cole Gustafson, chair of the Department of Agribusiness and Applied Economics at North Dakota State University.
Not that setbacks are stopping Poet. It announced last month it will partner with Dutch firm Royal DSM to make the world’s first commercial-scale cellulosic biofuel plant a reality. “Project Liberty’s” home is Emmetsburg, Iowa, and its goals are lofty: 25 million gallons per year starting in 2013.
To put it into perspective, total US output of cellulosic ethanol was barely more than one-quarter of that in 2011 at 6.6 million gallons – and, worth mentioning, a meager 3% of the EPA’s initial expectations. So much for “build it, and they will come?”
“Cellulosic is going to happen [commercially,] but it’s taking longer to get the right chemicals,” so that the cellulose can be broken down in a cost-effective way, says Gustafson. He is working on plans for an ethanol plant that he says is nearing construction in the state. “It’s going to start off as a very traditional corn ethanol plant, and then over time shift to cellulosic as the technology becomes perfected.”
Fertilizer Hopes
As of today, early 2012, corn ethanol and its byproducts absorb 40% of the US crop. For fertilizer makers like Potash Corp. of Saskatchewan, ethanol is one force underpinning demand as nutrients continue to be rocked by high natural gas prices. Potash faced tough markets at the end of 2011, but it sees potential record fertilizer shipments of 55 to 58 million tonnes globally, up from 57 million tonnes last year.
Mosaic Co. in January warned quarterly results will decline due to “near-term macroeconomic uncertainty and cautious distributor purchasing behavior,” but stood by its outlook for strong long-term demand. It is projecting record potash and phosphate shipments in 2012.
Echoing the others, CF Industries, the world’s second-largest nitrogen fertilizer behind Norway’s Yara International ASA, is optimistic on the North American crop nutrient market. USDA’s tight corn stocks-to-use trend “will support high corn prices for the next several years.” Global fertilizer supplies are mirroring those of corn – good news for margins.
CF is also upbeat on Argentina and its late arrival into corn ethanol. Argentina’s government recently greenlighted five new plants to supply corn- and sorghum-based ethanol, the largest of which Bunge Ltd. and Aceitera General Deheza will operate in the Cordoba province. Bert Frost, vice president of CF’s sales and market development, commented on a recent conference call, “We think that’s a great situation for the world and for the continued analysis of supply and demand … that has to drive yields in Argentina,” and, ergo, nitrogen applications and the future export market.
Sweeter Deal, In Theory
Also gone with the US subsidy is the 54-cent-a-gallon tariff on imports. Brazil knows Americans won’t be swimming in its famed sugarcane ethanol anytime soon – chiefly because it has troubles meeting its own demand. But at the very least, the US developments offered its bruised industry a much-needed psychological boost.
The “Father of Ethanol” Mario Garnero cheered the decision in a meeting with private investors in Paris in January, calling it in a press statement a “milestone of historical proportions to the good of the two largest economies in the Hemisphere. It clears the way to a higher level of trade between the US and Brazil.”
Garnero galvanized the movement for government incentives to automakers to turn out ethanol-fueled vehicles back in the 1980s, when he served as chair of the Brazilian Automakers Association. “I am thrilled to see this decades-long work bear fruit,” he said, but innovation has to be priority No. 1 to “bulk up Brazil’s technological capacities.”
It’s the common theme in the Brazilian ethanol industry, the world’s second largest: how to attract investment. Its mills can squeeze not a drop more out of current capacity, says Géraldine Kutas, the Brazilian Sugarcane Industry Association’s (UNICA) head of international affairs. “The problem is lack of appetite to invest in new plantations and new production facilities,” she told Farm Chemicals International. Leaner times and rising costs have also led more growers to forgo crop insurance.
“The truth is, in Brazil we are investing less in terms of renewing sugarcane fields, because we are still suffering from consequences of the 2008/2009 financial crisis. We aren’t Europe – we don’t have [farm] subsidies.”
As the number of flex-fuel vehicles (90% of its current light vehicle sales) and global sugar demand climb, UNICA says the country needs to double its cane output to 1.2 billion tons by 2020.
The Brazilian Economic Development Bank has earmarked $22 billion for investments in the sector through 2014 to help meet that goal, but it is not a panacea.
According to USDA’s Constanza Valdes, poor roads impose high costs on farmers in the country’s Center-West distillery frontier: The average distance from that region to export ports is over 600 miles.
To meet growing demand, Valdes says, infrastructure projects will need to happen. This includes the two ethanol pipelines that Petrobras, one of the world’s largest oil companies, is slated to start building this year and complete by 2016. The pipelines would lower the cost of shipping ethanol by one-third, compared to shipping by truck, and are expected to accommodate 22 billion liters, doubling current transportation capacity.
Brazil will require in the neighborhood of $56.6 billion in investments during the next 10 years to boost the supply of ethanol via production mills, pipeline and port infrastructure, Mauricio Tolmasquim, president of EPE, the government’s energy research company, said recently.
Policy is another thorn in the industry’s side. The Brazilian government still controls gasoline prices, which haven’t changed at the pump since 2009. At the same time, it has increasingly cut taxes paid by state-run Petrobras, while not extending the benefits in kind to ethanol.
“Expanding the number of flex-fuel vehicles won’t mean much in terms of ethanol use if at the pump the price of gasoline remains frozen, regardless of global oil prices. Although ethanol is infinitely sustainable, there is no way to compete,” UNICA President Marcos Jank said at a recent event in São Paulo. “We are not calling for higher gasoline prices, but we do want fair competition, which requires, among other measures, a review of the tax burden on ethanol,” he added.
Other areas to watch are currency valuations and crude oil and sugar prices. Case in point: When the real currency appreciated and poor harvests sent sugar prices soaring in 2010, Brazil’s government cut the blending mandate to 18% from 25% (it’s now at 20%) and bought up cheaper US corn ethanol, turning it into a net importer of the biofuel. And it wasn’t the first time.
Weather, too, is an obvious critical factor. Sugarcane needs at least 24 inches of rainfall a year, but the South-Central growing mecca that provides 90% of the country’s output is drought-prone.
In the words of USDA Senior Economist Tom Capehart, “It’s a very fluid situation right now in Brazil.”
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