Governors' Biofuels Coalition

Short-term, long-term factors conspire to hinder the industry.

But now Iowa service stations that want to use E15 have learned that they can’t pump it because E15 isn’t compatible with the special summer blends of unleaded gasoline sold from May 15 to Sept. 15. Those blends help big urban centers such as Chicago, Minneapolis-St. Paul and St. Louis comply with clean air regulations.

Because Iowa is relatively close to those urban centers, its stations can’t sell the higher ethanol blend until mid-September. Meanwhile, stations in Nebraska, which are farther removed from Chicago, are free to sell higher blends this summer. This pump in Shelby, Neb., can dispense E15, E20, E30 and E85.

What vehicles can use E15?

The U.S. Environmental Protection Agency has approved use of 15 percent blend for vehicles model year 2001 and newer. E10 remains the limit for passenger vehicles older than the 2001 model year and for other engines and vehicles that use gasoline, such as lawn mowers, motorcycles and boats.

Race fans cheered a week ago at the “American Ethanol 200” NASCAR race, where cars were powered with the 15 percent blend of ethanol.

The race was a promotional boost for ethanol. Unfortunately, the only Iowans who can put more than 10 percent ethanol in their tanks are the roughly 5 percent of vehicle owners whose models can use up to 85 percent ethanol.

Legal and bureaucratic delays mean E15 is still out of reach for consumers, and a potential 7 billion-gallon expansion of motor fuel market share remains elusive for ethanol producers.

The E15 holdup is the latest snag to trip up an industry that’s now a major contributor to Iowa’s economy, with 41 ethanol plants generating 3,000 jobs and $15 billion in business. And by consuming 60 percent of Iowa’s corn, the industry has boosted prices for another major cog in Iowa’s economic engine: the nation’s biggest corn crop.

Both short-term and long-term factors are conspiring to prevent the industry from becoming the boon once foreseen by the industry’s pioneers. Big Oil, livestock producers and others are fighting expanded ethanol use, and the long-awaited widespread production of cellulosic ethanol, made of plants or parts of plants that aren’t used for food, remains years away.

Short term, ethanol plants are losing money, and with corn prices spiking because of the drought, concerns are growing that plants will close this year. That makes the delay in opening the E15 market all the more frustrating for industry leaders.

“We’re at a saturation point in our market, and we need E15,” said Monte Shaw, executive secretary of the Iowa Renewable Fuels Association.

E15 was thought to be a sure thing when President Barack Obama moved into the White House in early 2009, but his Environmental Protection Agency took two years to approve the higher blend, then another year to write the rules that will govern sales.

E15 was thought to be the next big market expansion for ethanol once it reached the 10 percent “blend wall” of total U.S. gasoline sales and production.

But now Iowa service stations that want to use E15 have learned that they can’t pump it because E15 isn’t compatible with the special summer blends of unleaded gasoline sold from May to September. Those blends help big urban centers such as Chicago, Minneapolis-St. Paul and St. Louis comply with clean air regulations.

Because Iowa is relatively close to those urban centers, its stations can’t sell the higher ethanol blend until mid-September. Meanwhile, stations in Nebraska, farther removed from Chicago, are free to sell higher blends this summer. Iowa will face the same problem every summer.

“We want to use E15 to support Iowa agriculture, but we can’t until September,” said Jim Becthold, car care center manager for Linn Co-op of Marion, which had hoped to become the first Iowa retailer to dispense E15.

The number of stations that will sell E15 in mid-September is unknown, but the Iowa Renewable Fuels Association acknowledges that the total will be small at first. The early users of ethanol have tended to be agricultural cooperatives. The major convenience store chains have yet to commit to E15.

Producers blame the oil industry

Ethanol boosters note darkly what they see as a concerted effort by major oil companies, who still control the distillate fuel market, to limit a growing role for ethanol.

“The oil companies just don’t want to give up another 5 percent of the market to biofuels,” said Jeff Laut, president of Poet of Sioux Falls, operator of seven ethanol plants in Iowa.

“Big Oil would drive us out of business if they could, but for now they’ll settle for stopping E15,” said Todd Becker, chief executive officer of Omaha-based Green Plains Energy, which has ethanol plants at Shenandoah, Superior and Lakota.

The oil industry has responded to the potential onset of E15 with fresh warnings that the fuel will damage car engines, claims the ethanol industry disputes.

When Kansas’ first E15 pump opened a week ago, Bob Greco of the American Petroleum Institute said: “We need to press the pause button on EPA’s rush to allow higher amounts of ethanol in our gasoline. The new fuel could lead to engine damage in more than 5 million vehicles on the road today and could void the manufacturer’s warranty.”

Bob Dinneen, the CEO of the Renewable Fuels Association, counters that E15 is “probably the single most studied fuel in the history of EPA waivers.” Regulators say the fuel is safe for any model year 2001 vehicle or newer.

Drought, high prices spell more trouble

Oil producers, however, aren’t the only critics of ethanol. Last week, a coalition of livestock producers, made nervous by corn prices that reached $8 per bushel, called on the federal government to relax the Renewable Fuel Standard, which requires that refiners mix ethanol with gasoline.

The Midwest drought has been an unpleasant surprise for ethanol. The rising price of corn threatens to throw ethanol in front of any public mob angry about high food prices.

The livestock feeders’ argument is an old one, but it’s expected to have more traction this year because of the record high corn and soybean prices.

Des Moines commodity broker Tomm Pfitzenmaier notes: “If prices begin to rise because of it, then it is bound to attract the attention of politicians, and that is when the focus is really going to come on to the ethanol industry with full force. There are a lot of groups that have been after the industry for a while, and this is going to give them a lot of ammunition.”

Ethanol producers are in the same boat as the livestock feeders; they have to pay higher corn costs, too. Last week cash bids for corn at most Iowa ethanol plants reached the unheard-of levels of $7.60 to $7.90 per bushel.

Those high costs are added onto what has been a tough year for ethanol producers.

In the first six months of 2012, the average ethanol plant in Iowa has operated at a negative margin of 14 cents per gallon. That comes after a 36-cent-per-gallon profit margin for the last six months of 2012.

Dropping demand adds to problems

Operators of Iowa’s 41 ethanol plants knew at the beginning of 2012 that the year would be difficult. The industry lost its federal 45-cent-per-gallon tax credit, which removed some of the incentive of oil companies to blend gasoline with ethanol.

The loss of the tax credit wasn’t a surprise. What was a surprise was a drop in national gasoline demand of 2 percent to 3 percent in the first half of the year, attributed to more efficient car engines and an uncertain economy.

“If gasoline demand is down, then demand will be down for ethanol,” said Shaw of the Iowa Renewable Fuels Association. “That has made the inability to sell E15 all the more frustrating.”

The negative margins have affected everybody. Giant ADM, which operates ethanol plants at Clinton and Cedar Rapids, attributed a dip in first-quarter profits to the narrowing of ethanol profits.

Green Plains reported a first-quarter loss. Becker said the plant at Superior was put on reduced production in February.

Valero Energy of San Antonio has gone further, closing plants in Nebraska and Indiana because the economics weren’t working. Valero spokesman Bill Day said the company would continue to run its four plants in Iowa at Charles City, Albert City, Hartley and Fort Dodge.

The ethanol industry may be relatively young, dating essentially to federal laws passed in the middle of the last decade that mandated renewable fuel use. But in that short time, ethanol managers have seen both the mountaintop of robust profits and the valley of bankruptcy despair.

In 2006, amid the first euphoria of the ethanol boom, margins were more than $2 per gallon. A year later, amid a sudden flood of ethanol into the markets from new plants, margins dropped to a dime a gallon.

Then in 2008, corn prices shot up briefly to almost $8 per bushel, enough to lead to the bankruptcy of Iowa’s largest producer, VeraSun. Valero ultimately took over its plants.

“Higher corn prices are only a challenge for the ethanol industry because of increased capital cost to operate, but this is not the first time we’ve seen corn prices go up,” said Laut of Poet.

In 2010 Hawkeye Energy and its four plants at Menlo, Iowa Falls, Fairbank and Shell Rock went into reorganization and were sold to a subsidiary of the Koch Brothers energy interests.

“We’ve learned a lot since 2008,” said Walt Wendland, president of the Golden Grain Energy ethanol plant at Mason City. “We’re more efficient operators. I don’t think this downturn will put a lot of people under.”

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