Trump’s billion-dollar gambit: An ethanol deal to meet the demands of farmers and Big Oil

Source: By Tim Mullaney, CNBC • Posted: Tuesday, September 24, 2019

The Trump administration appears to be moving toward a deal to placate ethanol interests who have blamed the president’s deregulatory push for forcing the closing of 17 ethanol plants. It’s a deal where the administration is trying to do damage control and balance the demands of farmers and oil companies, two of Donald Trump’s most loyal constituencies.

The deal, still not yet reduced to a written bill, is likely to help oil companies that have been given permission to stop blending ethanol with gasoline at some of their refineries to make up the lost production at other plants, said Geoff Cooper, president and CEO of the Renewable Fuels Association, a trade group for ethanol producers.

The negotiations have happened in at least two recent White House meetings — one between President Donald Trump and Republican senators from farm states, including Chuck Grassley and Joni Ernst of Iowa, one of several midwestern states the resident won in the 2016 election after it voted twice for his Democratic predecessor, Barack Obama. The other, on Sept. 11, was between company executives and White House staff. There is still no timetable for when the plan will be finalized.

“We’re not asking for much,” Cooper said. “If you give out exemptions, you erode the market for ethanol. It’s why you have the demand destruction that we’ve seen.”

The ying and the yang among farmers and Big Oil

The rules at issue are called small refinery exemptions, which the Trump administration has expanded at the behest of oil companies and to the consternation of ethanol interests.

The exemptions let so-called small gasoline refineries — including some owned by oil giants Exxon Mobil and Chevron —out of their obligations to produce ethanol under the renewable fuel standards rules approved by Congress in 2005 and 2007 to address climate change.

Because ethanol emits less carbon than conventional gasoline when burned, the renewable fuels standard requires that refiners include 15 billion gallons of ethanol in their products annually. That’s enough for most of the nation’s gasoline to include 10% ethanol, which is usable in every new passenger vehicle sold in the U.S., Cooper said. The U.S. Department of Energy says flex-fuel vehicles can use 15% ethanol fuel or 85% ethanol fuel, with the more ethanol-rich blends being more popular in farm states near where ethanol is produced.

The U.S. Environmental Protection Agency each year allocates each refinery’s quota for ethanol production in a rule implementing the statute. After that, however, the agency has been granting retroactive waivers to excuse refineries from their legal duty. The so-called SRE exemptions, which have been granted retroactively, reduce the market for ethanol to between 13 billion and 14 billion gallons annually, Cooper said.

Under the Obama administration, officials granted about eight SRE exemptions each year. The Trump administration announced 31 in a single round in August, bringing its total to nearly 80.

U.S. ethanol producers made 14.4 billion gallons last year, down from 14.5 in 2017 for the first year-to-year decline since the 1990s, U.S. Department of Energy figures show.

Ethanol industry has a supply-and-demand problem

But the industry brought on many of its own problems with overexpansion as well, said Scott Irwin, an agricultural economist at the University of Illinois at Urbana-Champaign.

“I believe companies are using the SRE requests as a way to address overcapacity,” Irwin said.

Each closed plant directly employs about 50 workers, Cooper said, with more impact on trucking and other transportation companies that move the product to market, and on local producers of corn used in the fuel. The largest number of plants that have either closed or reduced production belong to the nation’s largest ethanol producer, Poet Biofuels, a closely-held company based in Sioux Falls, South Dakota.

“Fifty jobs in a rural county is nothing to sneeze at,” Irwin said. “They’re good jobs, probably with benefits. And transportation would be hit hard, along with the local price of corn. It’s probably a nickel a bushel for every farm within the service area of that refinery.”

The drop in demand has taken a toll on the profits — and the stocks — of the two leading ethanol producers that are publicly traded: Sacramento, California-based Pacific Ethanol and Green Plains, based in Omaha.

Pacific Ethanol’s sales dropped 13% to $702.1 million in the first half of 2019, with net losses little changed at slightly more than $20 million in each period. Green Plains sales fell 24% to $1.53 billion, with per-share losses almost quadrupling to $2.19.

Green Plains had lost almost two-thirds of its market value in the past year, beginning to rally in the last week as talks on a settlement moved forward. At the same time, the price of ethanol fell more than 30% between mid-June and mid-August, when the administration announced the latest list of refineries excused from ethanol blending.

States feel the squeeze

Despite confidence that a deal is near, which has let ethanol prices bounce up from recent lows, officials from states that are big producers of both corn and ethanol — especially Iowa — expressed caution.

“We’re waiting to see that in writing, and hopefully we’ll get that sooner rather than later,” Reynolds told reporters on a conference call on Sept. 18, the Des Moines Register reported. “And we’ll continue to touch base with the administration and just see where they’re at on it. But I take them at their word.”

“I’ve been hoodwinked so many times, not just by the EPA on this issue but by other bureaucracies as well, so I’m going to see if what we talked about is the end product,” Grassley told reporters Sept. 17, the Register said.

The administration declined to make officials available for comment, providing a prepared statement attributed to an EPA spokesperson.

“EPA will continue to consult with our federal partners on the best path forward to ensure stability in the Renewable Fuel Standard,” the statement said. “The Trump Administration has overseen year-over-year increases in domestic fuel ethanol production, to the highest level in history and the United States exported a record volume of ethanol in 2018 for the second consecutive year.”

The president himself has vowed to help ethanol producers and farmers, possibly as part of a broader package of relief for agricultural and energy industries hurt by trade tensions with China.

Indeed, farmers had expected trade to help offset the impact of the small-refinery exemptions, but China hiked tariffs on U.S. ethanol last year in an early round of the trade war and “hasn’t bought a drop,” Cooper said.