Ethanol is here to stay says Renewable Fuels chairman

Wednesday, November 4, 2015

by JIM ALGIE

Pending changes to the U.S. Renewable Fuel Standard (RFS) have begun finding their way into analysis of weaker autumn markets for most agricultural commodities.

However, Canadian Renewable Fuels Association chairman Jim Grey said, Thursday, southern Ontario’s corn-dependent, ethanol industry remains well-situated to benefit and expand, particularly as Canada’s new federal government explores the details of its new environmental mandate. Quite apart from the use of ethanol in petroleum fuel blends, the industry is actively pursuing a variety of new industrial products that take it out of the U.S. policy debate about renewable standards for fuel.

“It’s to a degree worrisome because it’s not in general the direction we want the industry to go,” Grey said of U.S. plans to pull back on the renewable fuel standard. The CEO of the seven-year-old Integrated Grain Processors Cooperative Inc. which processes ethanol at the rate of about 170 million litres annually from a plant in Aylmer, Ont. said, however, ethanol is here to stay.

Amid growing pessimism about short term field crop markets, the U.S. Environmental Protection Agency (EPA) has proposed reducing biofuel targets set by existing law. The EPA and Congressional committees have held public hearings on the subject this year ahead of a final decision expected by Nov. 30.

An early October joint white paper of the National Corn Growers Association and the U.S. National Farmers Union links “lax enforcement” of legislated fuel-blend mandates with a recent U.S. Department of Agriculture (USDA) forecast of steep farm income decline in the current crop year. The white paper says the EPA “is failing farmers, rural communities, our environment and economic security by refusing to fulfill its responsibilities to administer the RFS consistent with its statutory obligations.”

Under U.S. law, the EPA sets annual targets for renewable fuels blended with petroleum in the U.S. fuel supply; the target is currently at the rate of about 10 per cent. The Canadian federal government and some Canadian provinces have adopted similar renewable fuel mandates but at lower levels than those in the United States.

New, lower U.S. targets for renewables have become controversial amid what had been a declining rate of petroleum use, slower than expected development of cellulosic biofuels and a variety of technical issues associated with burning higher levels of ethanol in older engines. Some biofuel advocates see recent, much lower petroleum costs and softening of the renewables’ standard as part of a competitive strategy by petroleum interests to block increased market share for renewable fuels.

Guelph-based agricultural economist Al Mussell said in an interview, Wednesday, that U.S. regulatory developments could affect Ontario growers but have greater significance for the province’s corn processing sector.

“If renewable fuel demand were to decrease in the United States what it will do, all other things being equal, is that it would soften the basis for corn in the U.S. mid-west,” Mussell said.

“On the grower side, I’m not sure if this is a real significant consideration or a worry,” he said. Mussell, who is lead researcher for Guelph-based Agri-Food Economic Systems, has not conducted direct research on the subject of U.S. renewable fuel mandates; but he’s following the debate which has begun to enter analysis of current, down-market trends in most agricultural commodities.
 
“The reason it’s significant to the users of corn is corn processing or livestock feeding, et cetera, will move to where the corn is relatively lower cost; so that’s why you worry about those relative basis levels,” Mussell said.

“If biofuel demand were to taper off . . . then the relative cost advantage to users of corn would go to the U.S. mid-west and away from Ontario,” he said. So far, there’s no sign of a decline in biofuel production.

University of Illinois economist Darryl Good in a weekly outlook report cites strong corn demand for ethanol production currently. However, Good also predicted “large, year-over-year increases in ethanol production experienced so far this year will not persist.”

Current USDA data shows corn used for ethanol production up about one per cent over last year at 5.2 billion bushels. Good’s Nov. 2 report said the EPA’s final renewable fuel standard targets through 2016 expected by month end “will provide more insight on ethanol production prospects.”

In an agricultural outlook report for 2015 through 2024, the Paris-based Organization for Economic Cooperation and Development (OECD) and the United Nation’s Rome-based, Food and Agriculture Organization predict lower-than-expected demand for biofuels as part of a generally lower market for farm commodities.

“Under the projected lower oil prices, the production of first generation biofuels is generally not profitable without mandates or other incentives,” the 148-page OECD-FAO outlook document says. “Policies are not expected to lead to significantly higher biofuels production in the United States or the European Union,” the report says.

IGPC’s Grey has a much different perspective on the future of his industry and of his company, which is an 800-shareholder mainly farmer-owned cooperative. An industry which depended on fuel mandates as a startup incentive has evolved since then, Grey said.

“There’s a mandated market certainly for ethanol but there’s a functional market as well because it’s built into the infrastructure as an octane enhancer,” Grey said. Canada’s domestic ethanol industry, located mainly in southern Ontario near corn sources and large population centres, has some advantages over U.S. competitors because it is “strategically located to the end user,” Grey said.

“Is there U.S. ethanol coming in to Canada? Certainly there is. But we’re not concerned that we’re suddenly going to see the domestic market flooded with American ethanol as a result of any political changes in the U.S.” Relatively high-value U.S. currency is part of the story. But, for ethanol processors, lower corn prices are essentially a wash as ethanol prices follow trends in corn prices.

“I’ve been involved in buying corn for more than 30 years now and there’s nothing that cures low prices like low prices, right? So everybody in the supply chain has to do well,” Grey said. “Corn and ethanol tend to trade in lock step.”

Increasingly, ethanol producers are seeking other uses for their products and facilities. That means corn oil as biodiesel and polyols — polymers capable of a variety of industrial uses such as automobile interiors. It also means alternative higher value products such as the solvent isobutanol, Grey said.

Despite current talk of proposed policy changes in the U.S., renewed talk about environmental policy there and in Canada involve a potentially significant new role for the industry as both governments consider carbon pricing and “cap and trade” policies.

“If anything, I see more ethanol blended as opposed to less ethanol blended,” Grey said. Both the current provincial government and the former Canadian government have participated actively in IGPC projects since 2008.

A repayable federal loan of $3.7 million last February helped the company install new, fibre separation technology to boost operational efficiency, a federal government statement at the time said. The loan builds on an earlier, $6.09 million government investment that helped build the Aylmer plant which began commercial operation in late 2008.

Grey said he’ll continue pressing for government support of renewables on issues such as the push for greater fuel efficiency in lighter, higher-compression automotive engines of the future. For technical reasons, such engines will require higher levels of ethanol at rates exceeding 25 per cent in the fuel blend, Grey said.

“We have a new federal government who has a very strong agenda and a strong green mandate and are going to look to put a price on carbon nationally. I think ethanol is here to stay,” Grey said. “Through our industry association we’ll certainly be actively talking to the new government as soon as they find their desks on Parliament Hill.” BF