Ethanol’s rough 2020 ride: Trade wars, COVID-19 and waivers alter its momentum
One year ago, the ethanol industry was zooming on the economic highway and celebrating a big win. The Environmental Protection Agency had finally approved E15 for year-round use and President Donald Trump was visiting Southwest Iowa Renewable Energy in Council Bluffs, Iowa, to take a victory lap.
In a recent conference call with reporters, Geoff Cooper, president and CEO of Renewable Fuels Association, said that day the ethanol industry and corn farmers had an incredibly rare opportunity to speak directly with the president and make the case for the benefits of ethanol to communities, economies and the environment.
And still, shortly after Trump’s visit, the EPA granted 31 small refinery waivers from the Renewable Fuels Standard in the fall that would have wiped out any traction that year-round E15 approval had gained the industry. Looking back, that was one bump in the road compared to the potholes waiting in spring 2020. Still it took major efforts to keep the momentum of E15 going forward and the industry got a push in January.
“At the end of January the 10th Circuit Court of Appeals struck down some of the small refinery exemptions and set precedent that would limit the EPA to granting those SREs going forward,” Cooper said.
That save, Cooper said, along with the prospects of the Chinese market opening its doors to U.S. ethanol and distillers grains in the Phase 1 trade deal, meant that the industry ended 2019 in a brighter spot. And the start of 2020 had even more good news, with the completion of the United States-Mexico-Canada trade agreement and the U.S. Department of Agriculture launching an infrastructure grant program to boost use of higher blends of ethanol.
But then, March came around like a patch of black ice in the middle of the interstate and the ethanol industry is still correcting the skid.
The COVID-19 detour
Scott Richman, chief economist for RFA, further explained the economic detours that ethanol is facing. He compared 2020 data during the height of the pandemic to 2019 data when E15 was approved for year-round use, using data out of Minnesota and Iowa. In those two leading states, sales of year-round E15 increased by 30 to 38% in 2019.
“Last year, on a per-station basis, sales kept right at pace in the summer from where they had been in the months leading up to it,” Richman said. In 2019, he continued, there was an estimated 430 million gallons of E15 sold in the U.S., which was very close to a 50% increase over the 2018 sales of E15. That was a huge bump for ethanol consumption in the U.S. and put the industry on the faster track.
But then, the Saudi Arabia-Russia oil price war essentially destroyed oil markets in March, dropping oil to negative prices per barrel for the first time in history. Gasoline prices at the pumps followed, which was great news for consumers, but devastating for ethanol plants that supply blends for those fuel pumps.
“Then, COVID-19 hit us and states began issuing shelter-in-place and stay-at-home orders and locking down the economy,” Cooper added. “That collapsed fuel demand. We saw the ethanol industry idle half of its capacity. Plants were shutting down. There were layoffs and furloughs. Then a handful of oil state governors submitted waiver requests for 2020 and now the EPA was trying to skirt the 10th Circuit’s ruling. And then there was growing doubt about the Phase 1 deal with China.
“We went from opportunity just a few months ago, to crisis mode in just a few short months this spring,” he said.
In late April, RFA released its report into the economic impact of COVID-19 on the ethanol industry and it showed that gasoline consumption was nearly half of what it was at the same time in 2019, from just under 10 million barrels per day in January to just under 5 million barrels per day in April. Because nearly all gasoline in the U.S. is blended with ethanol, that was a proportional drop in ethanol usage, too. From a high of around 900,000 barrels per day in January, to just over 500,000 barrels a day in April.
As of the April 20 report, 70 ethanol plants with an annual production capacity of 6.2 billion gallons of ethanol were fully idled, and 70 more plants had reduced their operating rates by 2 billion gallons annualized.
“At least 48% of the industry’s total production capacity is now offline, and only one-third of facilities are operating anywhere close to capacity,” the report stated. Spot prices in Chicago fell from $1.40 per gallon at the end of 2019 to $0.85 per gallon in April in response to rising ethanol inventories and halted demand. Corn futures prices from March to April fell by 17%, according to the report.
The report predicted that in order to balance supply and demand, ethanol production will have to be cut back by 20% or 3 billion gallons in 2020. And continuing reduction in consumption because of the pandemic’s social restrictions, job losses and the economic downturn from the initial lockdowns across the nation will result in a $0.56 per gallon drop in the price of ethanol on average from March until December 2020 and hits during peak summer travel months.
“The combination of lower production and falling prices is expected to cause ethanol sales to plummet by $10.5 billion or 46%,” the report stated. Those losses may be much larger when all is said and done and the economic impact to communities that rely on ethanol plants is calculated.
Steering into the skid
The initial jolt of an entire country staying off the highways and reducing fuel consumption was in no one’s business plans. But the ethanol industry is built on innovative problem solving. While the industry’s alcohol couldn’t be turned into ethanol for fuel blending, it could be used to fight the very virus causing the problem as hand sanitizer.
Mike Jerke, president and CEO of SIRE, explained bio-refineries like the SIRE plant in Council Bluffs have long since expanded their portfolios from just ethanol for fuel. SIRE typically produces 130 million gallons of ethanol each year, but it also markets 245,000 tons of dried distillers grains and 150,000 tons of wet distillers grains that go on to livestock feeding operations in the area. It sells 40 million pounds of distillers corn oil each year, which goes into livestock feed as well as the biodiesel stream. And the process creates 100,000 tons of carbon dioxide each year that is captured and sold to the food industry for use in meat processing and other production.
But ultimately, the key product in the biorefinery process is alcohol, Jerke said. And even though SIRE had to cut its production in half because there was no ethanol demand for fuel, COVID-19 did present an opportunity for turning that alcohol into hand sanitizer for public health.
So, with the U.S. Food and Drug Administration and the Alcohol and Tobacco Tax and Trade Bureau on board, many plants across the U.S. in the same situation as SIRE switched from a fuel focus to a sanitizer focus. Jerke explained that SIRE donated thousands of gallons of its alcohol to Iowa Prison Industries to make and bottle hand sanitizer for hospitals and first responders to use. And then SIRE was able to produce and bottle its own hand sanitizer on site, marketed as SIREtizer.
The company used the World Health Organization’s sanitizer recipe and transitioned SIRE employees to bottling 500 to 1,000 gallons of SIREtizer in a day in its “outdoor factory” and indoor bottling site.
It was that flexible thinking that helped SIRE keep its employees working through the pandemic, helping area agencies in need, and keeping the community’s economy still rolling. For example, SIRE worked with local restaurants and bars to sell its SIREtizer along with their take-out menu offerings. The brick-and-mortar locations—who took a huge financial hit during the pandemic—take a portion of the profits and the rest goes back to SIRE to help it donate SIREtizer to area hospitals. SIRE also has contracts with county and state agencies for SIREtizer.
Jerke added the ability to innovate comes from the farmers who initially created the ethanol industry as a way to add value to their corn crops.
“I’m really proud of the crew and their tenacity and innovation in the time of real economic stress and as we had to restrict our business and implement social distancing to keep everyone healthy and safe,” Jerke said. “We found an important cash flow source. We hadn’t planned on turning the plant’s production down by 50%. But the incremental amount of alcohol sales for hand sanitizer, that helped us.”
Jerke compared the 2009 H1N1 influenza crisis, where hand sanitizer was a recommended best practice, to the current COVID-19 pandemic, where hand sanitizer is really a required measure to curb the virus spread as communities re-open to business and travel. From rideshare services to metro transportation, hand sanitizer is a measure that will very likely be key to public health precautions.
“I think all of us in this business are evaluating how that plays out and becomes an opportunity,” Jerke said. “We’ve already made significant investments to support this as, initially, a temporary measure, but SIRE is also looking at it for the long-term as well.”
Reaction measures
Cooper said since the April 20 report, there are signs of recovery in the ethanol markets as gas consumption has picked up.
“People are returning to the roads,” he said.
On June 25, AAA issued its highly anticipated summer travel forecast for July through September, which estimates Americans will take 700 million trips based on economic indicators and state re-openings. That number is down 15% from the same period last year. And still, AAA bookings trends show that Americans are cautiously venturing out for more long weekend getaways and extended vacations.
“When they do venture out, travelers will take to the road with 683 million car trips to satisfy their wanderlust,” said AAA Senior Vice President of Travel Paula Twidale. Car trips in this time of COVID-19 will account for 97% of the favored mode of transportation.
And the RFA and American farmers are banking that many of those car rides will be fueled by E15.
“Ethanol production is up about 50% from the low point of late April, but it’s still 25% below pre-COVID levels,” Cooper said. More than 40 plants are still fully idled and many more are running well below their optimal capacity.
Even with the roadblocks from spring 2020, year-round E15 ethanol availability is holding up in the downturn, Richman said.
“Even during this coronavirus-induced downturn, E15 sales in March were still higher than the levels seen in 2018 in Minnesota with restrictions still in place,” Richman said. “Even though all that happened the rulemaking around year-round E15 is working.” More terminals have plans to offer E15 across the U.S., further expanding consumption over the next few years.
“Ethanol has been a solution, and it continues to be a solution,” Jerke said. Not only does ethanol production give a solid base to rural economies, but ethanol blended fuels provide cleaner air by replacing small particulates from traditional petroleum-based fuel streams, he added. And that’s especially important now in this time of COVID-19 and the respiratory concerns that come with this pandemic.
The ethanol industry may have had a bumpy spring with a detour or two along the way, but indications from the sector are that it’s still on a course to future prosperity.
Jennifer M. Latzke can be reached at 620-227-1807 or [email protected].
