Why ethanol’s recent surge looks temporary

Source: By Joe Cahill, Crain's • Posted: Monday, November 29, 2021

Higher demand has been a boon to a biofuel industry plagued for years by excess capacity that depressed prices and squeezed profits. The question, of course, is where ethanol goes from here.

ADM ethanol biofuel

Illinois corn farmers and ethanol refiners got an early Christmas present this year as prices for the corn-based fuel surged. How long the gift keeps on giving will depend in part on industry lobbyists’ efforts to hitch ethanol to government climate change policy.

Ethanol prices soared as Americans returned to the roads this summer. After hitting historic lows during the depths of the pandemic, traffic on the country’s streets and highways climbed 12% so far this year.

More driving means more gasoline sales, which means more ethanol sales. Federal law requires oil refiners to include ethanol in the fuel they produce.

Higher demand has been a boon to an ethanol industry plagued for years by excess capacity that depressed prices and squeezed profits. After sinking as low as 83.6 cents per gallon in April 2020, near-term ethanol prices at the Chicago Board of Trade leapt 45% to $2.21 this year.

Higher prices boost profits at companies like Chicago-based ADM, a leading ethanol refiner that has been looking for a way out of the business. Farmers in Illinois and across the country also benefit as higher ethanol production bolsters corn prices. More than a third of the nation’s corn crop goes into ethanol, according to the U.S. Department of Agriculture.

The question, of course, is where ethanol goes from here. Some portion of the recent upturn reflects pent-up demand from the pandemic. Driving likely will normalize over the next year or so, potentially bringing down ethanol demand and prices.

Cyclical fluctuations are only part of the picture. Ethanol’s longer-term prospects hinge to some extent on its role in the escalating campaign against global warming. Long touted as a “renewable fuel,” ethanol isn’t completely clean. A 2012 study by Argonne National Laboratory in Lemont found that ethanol consumption emits 34% less carbon than burning gasoline.

That’s a big difference, but ethanol still pumps greenhouse gases into a steadily warming atmosphere. Environmentalists argue that the ripple effects of cultivating large amounts of corn for ethanol also contribute to climate change.

Yet industry advocates say ethanol is essential to the ultimate objective of stopping the rise in global temperatures. The recent COP26 summit of world leaders set out a goal of net-zero carbon emissions by 2050 in order to limit temperature rise to 1.5 degrees Celsius.

Underlying the goals are various expectations, including a massive shift to electric vehicles. But ethanol interests point out that even if such a shift occurs, it will take years. In the meantime, lots of traditional fuel-burning cars will remain on the roads, spewing emissions. Wouldn’t it be better if at least some of those emissions contained 34% less carbon?

“Renewable fuels like ethanol remain the single most affordable and abundant source of low-carbon motor fuel on the planet—and are critical to meeting carbon reduction goals today,” Emily Skor, CEO of trade group Growth Energy, told Congress Nov. 16. “Recent research shows there is no path to net-zero emissions by 2050 without biofuels.”

Industry lobbyists argue that expanding government supports for biofuels would help counter the recent rise in gas prices while advancing climate goals. Ethanol has had plenty of government backing over the years, thanks to the power of U.S. senators from farm states. Today, the industry relies mostly on a mandate requiring oil refiners to use ethanol in an amount specified by the U.S. Environmental Protection Agency. That so-called “renewable fuel standard” tops out in winter months at about 10% of the gasoline sold at filling stations. The industry is pushing to lift the limit in the winter.

Successful lobbying could extend ethanol’s current boom and help preserve its viability as an auto fuel during the transition to electric-powered cars. But eventually EVs will be so prevalent that demand for gasoline and the ethanol it contains will start falling sharply. Beyond that point, the industry will need new markets for its product.

Some are already moving in that direction. ADM, for example, is converting most of its ethanol production capacity to produce clean-burning jet fuel. The U.S. and the European Union set a goal to produce 4 billion gallons in “sustainable aviation fuel” annually by 2030, which sounds like a lot, until you consider that the U.S. alone produced 14 billion gallons of ethanol last year. It will take a lot of new business to offset the loss of that volume.

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