U.S. ethanol market sees first sales decline in decades

Source: By Jim Spencer and Mike Hughlett, Minneapolis Star Tribune • Posted: Wednesday, March 18, 2020

Lower U.S. demand, plunge in exports made for rough 2018.

Like many U.S. ethanol producers, Chad Friese witnessed a strange phenomenon from 2017 to 2018. As production increased and sales to foreign countries rose to record levels, profits went down roughly 20 cents per gallon.

For Friese, CEO and general manager of the Chippewa Valley Ethanol Co. in Benson, Minn., that meant one thing. The domestic market for ethanol had stopped growing at the same time production hit a new record.

Figures from the U.S. Energy Information Administration show that domestic ethanol sales dipped slightly in 2018, the first decrease in two decades.

The ethanol industry largely blames the drop on an unusually large number of blending waivers that the Environmental Protection Agency passed out to oil refineries in 2017. The waivers absolve smaller refiners from federal standards that require them to blend ethanol with gasoline.

In Benson, a city of 3,000 in central Minnesota, Friese pronounced himself “frustrated” that the federal government “can’t find policies that are consistent with renewable fuels.”

Economists said the wave of waivers may be undercutting ethanol demand and prices, though any effect is hard to measure. Other factors are at work, too, in the ethanol’s industry’s malaise, particularly the loss of expected exports to China due to trade tensions.

Whatever the underlying cause, ethanol prices in 2018 plunged to levels not seen in over a decade and they remain historically low.

Geoff Cooper, CEO of the Renewable Fuels Association (RFA), a national trade group for the ethanol industry, estimated 2018 financial losses to ethanol companies of at least $1 billion nationwide.

Minnesota is the nation’s fourth-largest ethanol-producing state with 19 operating ethanol plants. Those ethanol plants consumed about one-third of Minnesota’s corn crop last year, according to the Minnesota Bio-Fuels Association.

The trade group said the state’s ethanol production rose 6.2 percent to 1.28 billion gallons in 2018. But corn prices were a bit higher in 2018 and more important, ethanol prices sank — crimping profits. Minnesota ethanol producers’ earnings before interest, taxes and depreciation fell 3.4 percent last year, according to the Bio-Fuels Association.

Some Minnesota-based ethanol companies reported losses last year, according to U.S. Securities and Exchange Commission (SEC) filings.

For instance, Highwater Ethanol in Lamberton, Minn., lost $6.2 million its last fiscal year, its first net loss since 2012. The company lost another $2.7 million during its first quarter, which ended Jan. 31. Lower ethanol prices were a key reason for the red ink, according to SEC filings.

Ethanol’s weakness has hit companies big and small. Minnetonka-based Cargill, a global agribusiness giant, noted that rock-bottom ethanol prices contributed to a 20 percent drop in its net income during the company’s most recent quarter.

Billions of gallons exempted

The Renewable Fuel Standard (RFS) adopted in the mid-2000s included a waiver for small refineries that could suffer a “disproportionate hardship” by blending ethanol into gasoline.

Under former EPA Administrator Scott Pruitt, the number of ethanol waivers granted by the agency rose from seven in 2015 to 29 in 2017, exempting billions of gallons from production. The agency said it has been transparent and consistent in issuing waivers. The EPA had 37 waiver requests in 2018. All of them remain pending.

Critics said Pruitt exploited the waiver program, giving free passes to companies owned by some of the nation’s largest oil companies. Other companies that received exemptions were not facing economic hardship, they said. Pruitt, the ethanol industry’s theory goes, placated friends in the petroleum industry who dislike the renewable fuel standard.

“Generally, under Administrator Pruitt there was an attempt to grant waivers that on their face seem ridiculous,” said Tim Rudnicki, who runs the Minnesota Bio-Fuels Association.

Pruitt quit EPA in July 2018 amid charges of ethics violations. Chippewa Valley’s Friese hopes that Pruitt’s replacement, Andrew Wheeler, “won’t be as loose” with waivers as Pruitt.

Wheeler has not discussed his plan for granting waivers. He is currently considering several of the 37 2018 requests, said RFA’s Cooper, and his decisions could resonate through the ethanol market for years.

As waivers increase, the demand for ethanol falls. “It can have big price effects in principle,” said Steve Polasky, professor of ecological and environmental economics at the University of Minnesota.

The problem, Polasky and other economists said, is that assessing the economic impact of waivers is difficult. “The degree to which the waivers are actually affecting prices — in my opinion — has not been quantified well,” said David Swenson, an economist at Iowa State University who follows ethanol.

Still, it’s “administratively important” for ethanol producers to make sure refineries follow the RFS, Swenson said.

The waiver fight is clearly not going away. “This gets to be a battle of interests,” Polasky said. “The oil people will say this is a minor thing, while the corn interests will say this is really hurting us.”

‘Crippling the market’

Democratic Sens. Amy Klobuchar and Tina Smith of Minnesota have sought more information on how EPA reached its recent waiver decisions.

In a statement, Klobuchar said EPA is overusing waivers and “crippling the homegrown biofuels market” by “granting small refinery waivers to multibillion-dollar oil companies.”

Smith said decreased domestic consumption of ethanol shows recent waiver policy “has caused real damage to Minnesota’s rural economy. The EPA should stop granting such waivers and instead focus on meeting President Donald Trump’s promise to expand the use of E15 in the nation’s fuel supply, which would increase demand for farm products and bolster farm communities.”

Four days after the ethanol industry pointed out the drop in domestic consumption and a few hours after Smith issued her statement last week, the EPA announced new rules that will let E15 (ethanol that is 15 percent alcohol) be produced year-round instead of nine months a year.

The rule announcement begins a process that usually take months. Ethanol companies want year-round E-15 sales in place by June 1, the date by which they are otherwise prohibited.

Meanwhile, ethanol inventories are near a one-year high, federal data shows, and prices — which started nose-diving 2017’s last quarter — are still in the tank.

In 2018, the annual average ethanol rack price at Omaha averaged $1.23 per gallon, the lowest since 2002 when it hit $1.12. In January and February of 2019, the average rack price was at or below $1.12.

To make matters worse for the ethanol industry, the price of oil and gasoline plummeted in 2018’s fourth quarter. The market for ethanol, which usually is a 10 percent blend in gasoline, is often tightly tied to what happens at the gas pump.

Retaliatory tariffs placed by China on U.S.-made ethanol — after the Trump administration taxed many Chinese imports — was a blow to the industry, said Jim Stark, head of investor and media relations at Omaha-based Green Plains. The company, one of the nation’s largest ethanol producers, operates plants in Fairmont and near Fergus Falls.

The ethanol industry expected 200 million to 300 million gallons of exports to China in 2018, Stark said, but only got around 50 million before the tariffs kicked in.

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