Ethanol Industry Takes Pandemic In Stride: Farm Country Knows Ethanol Is Here To Stay

Source: By Scott Carpenter, Forbes • Posted: Monday, October 5, 2020

Like other farmers in this part of north-central Illinois, Jeschke regularly receives text messages on his phone that alert him to the latest selling prices of corn, one of his two main crops alongside soybeans, at a local rail market that ships corn off to markets in the Southeast. And on this day, in the heat of COVID-19 shutdowns in late March, his phone never stopped buzzing with news of falling prices.

The reason: 45 miles away, suffering from poor road fuel demand, a plant that turns corn into ethanol had shut down. Now farmers who typically sold corn to the ethanol plant were redirecting their corn to the rail market instead. Inundated with offers, the rail market could get away with buying corn at far lower prices than typical. “It was just a huge, huge drop,” said Jeschke, who farms several thousand acres with his nephew and brother-in-law near Mazon, Illinois.

The episode was a reminder of the seeming fragility of the ethanol market. Ever since Congress created the Renewable Fuels Standard (RFS) in 2005, the government has mandated the production of tens of billions of gallons of biofuels annually, the most popular being corn-based ethanol. Yet the primary goal of the RFS — to reduce America’s dependence on foreign oil — is now obsolete: the “fracking boom” of the last decade has turned the U.S. into an oil-producing superpower. That has made it easier for oil refineries to argue that they should be exempted from their obligation under the RFS to blend huge quantities of ethanol into their finished gasoline. (Refineries would rather produce pure gasoline than a blend of some 90% gasoline and 10% ethanol.) The Trump administration has listened, granting record numbers of such exemptions and further undermining ethanol demand.

In theory, the entire ethanol market could sharply contract in 2023. When it created the RFS, Congress only specified annual ethanol production through 2022, after which the Environmental Protection Agency (EPA) is supposed to determine new volumes. The EPA isn’t likely to steeply cut required volumes, nor even necessarily to cut volumes at all. Still, the setting of new volume requirements will renew attention on the fact that demand for ethanol exists solely because the government says it should.

And if all that weren’t enough, the advent of the electric vehicle age threatens to wipe out demand for ethanol entirely (to say nothing of gasoline). California underscored that reality less than two weeks ago when it pledged to ban the sale of new gasoline-powered cars by 2035.

Yet little of this bothers most farmers in the Midwest. They know that ethanol is probably going to be around in some form right up until the day the last gas-powered car heads to the scrapyard. (In the near-term, ethanol demand has already recovered to about 90% of normal.)

“Ethanol isn’t going away,” said Matt Carstens, the president of a farmer-owned cooperative in the Midwest called Landus. Patrick Millar, who follows the industry for financial services firm Gordon Brothers, said: “It’s not a concern for the industry.”

Ethanol has been a “godsend” to corn farmers, Jeschke said. Nearly 40% of all corn is now sold to ethanol plants for processing, while ethanol now accounts for around 10% of all gasoline in the U.S. The RFS’ ethanol production mandate helped usher in what Ed Usset, a grain marketing specialist at the University of Minnesota, called in an interview the “second golden age of American agriculture,” a period from 2007 to 2014.

But ethanol is more than a financial bonanza for farm land; it has also inspired unshakeable enthusiasm. As Jeschke puts it, growing corn for ethanol has given farmers like him a role to play in national issues on energy and the environment — even if he acknowledges that ethanol has its own, hotly contested carbon footprint that has led green groups like the Sierra Club to campaign against it.

“Part of it is my age, but I’ve begun to look at a bigger picture than just focusing on putting food on the table,” said Jeschke, who has been farming since 1975. “I feel like I’m contributing to something.”

He argues that ethanol also contributes to rural economic development. Although often overlooked, one of the Congress’ goals when it passed the RFS in 2005 — with an update in 2007 — was to “strengthen the economy of rural communities that could contribute to biofuel production,” according to a Congressional Research Service note. And indeed there is some evidence that the building and operating of ethanol plants in rural areas around the country has driven employment and increased nonfarm economic activity in areas that have traditionally struggled to attract new talent. (Economists point out, of course, that the government’s ethanol production mandate still amounts to a subsidy and that the market-distorting effects would work to offset any job creation.)

“There are small rural towns in America where virtually everyone is leaving,” Jeschke said. “And now all of a sudden you’ve got a grocery store that comes back and starts up again. You’ve got new restaurants going up. Why? Because you have to build ethanol plants where farms are. And farms tend to be in rural parts of America.”

Such faith in ethanol has inspired the creation of countless trade publications — from Ethanol Producer Magazine to Biomass Magazine — and created one of the country’s most fearsome political constituencies. Presidential hopefuls face the wrath of the Midwest’s farm-country — and, in the primaries, a bruising start to election season — if they so much as hint at discontinuing the RFS. The latest election cycle is no different. After a couple years of granting large numbers of exemptions on biofuel blending requirements, President Trump’s EPA recently rejected the requests of small oil refineries to claim retroactive exemptions from their ethanol blending requirements, winning plaudits from farmers. Meanwhile Democratic nominee Joe Biden in late August pledged his firm support for ethanol and the RFS.

Jsechke never wanted to be anything but a farmer. He graduated from the University of Illinois at Champaign-Urbana in 1975, where he studied Agricultural Science. He has seen a lot of changes in the industry. Once, you could yank corn stalks from the ground with one hand, but genetic modifications have now made crops so robustly healthy that you can’t pull them up with two. Years ago the horizon here was a clean sweep. Now a series of towering wind turbines partly butts into his fields.

Sometime in the next few decades, wind farms like this one will pipe electricity into most cars on the road, largely erasing demand for ethanol and other road fuels. Asked about how farmers would be affected once such a reality does arrive, Jeschke paused, uncharacteristically lost for words. It almost seemed too much to imagine.

“At some point we’re going to be using all kinds of different fuels,” such as hydrogen, he said. “But in the meantime, I think high-octane low-carbon ethanol is a good way to transition into that future.”