Ag Policy Blog

The last couple of weeks have brought several points home for grain and oilseed farmers and everyone in associated industries that serve them:

-Corn and soybean production will continue to incrementally rise. U.S. farmers are just that proficient.

-Export competitors in South America and in the Black Sea region also are growing larger crops.

-There's no new demand taking off.

-Ethanol policy can be held hostage.

-President Trump likes trade wars.

In a year when farm groups at Commodity Classic would have liked to stress the upcoming farm bill, ethanol regulations and metal tariffs were the major themes at the conference as so much attention was on White House decisions.

I spoke Wednesday at Classic to yield-contest winners for the National Corn Growers Association. A major point I sought to make is that the federal government is incredibly confused over future ethanol opportunities or use. That directly spills back on future corn demand.

USDA's long-term projection released February 15 says USDA economists think corn use for ethanol will peak in the 2019-20 crop year at 5.55 billion bushels, up 25 million bushels from 2018-19, the crop that will be planted this spring. After that, corn use for ethanol will slowly tick down 25 million bushels or so annually.

USDA states that "infrastructure, geographical and other constraints on growth for higher level ethanol blends (E15 and E85), and falling U.S. gasoline consumption due to rising fuel efficiency, rising real costs of fossil fuels, and changing consumer lifestyles and urban transport modes" all will lead to falling demand for ethanol. https://goo.gl/…

Also on February 15, the U.S. Department of Energy released a report looking at research on engines and fuels. The report spotlighted fuels with the highest potential to create more mid-level blends for markets through 2030. The goal of the study was to point out the best fuels with "a market pull of up to 25 billion gallons a year of domestically sourced fuel" that would improve fuel economy of both light-duty and heavy-duty pickups and create more lower-cost pathways to reduce greenhouse-gas emissions. The only feedstock that scored out successfully was the alcohol family -- ethanol. Only ethanol could hit the octane numbers and heat vaporization needed for the high-compression engines that will be coming for better fuel economy. https://goo.gl/…

So you have USDA saying ethanol demand has basically peaked. The Department of Energy is saying ethanol is really the only fuel that can provide the energy and market demands needed in the next 15 years -- for roughly 9 billion more gallons than current ethanol production.

A 2016 study by the Environmental and Energy Study Institute detailed more about the fuel higher-compression engines will increasingly demand. "A national transition to an optimized mid-level ethanol blend, between E25 and E40 would lower consumer fuel costs and standardize the fuel supply." https://goo.gl/…

Ag Secretary Sonny Perdue wants to see more ethanol growth by EPA allowing 15% ethanol sales year-round. But Perdue also points out the Renewable Fuels Standard will sunset in 2022 and then the EPA Administrator every year will make a determination of how much the RFS should be. The situation will basically create a perennial target for the petroleum industry and petroleum-state lawmakers to attempt the same leverage Sen. Ted Cruz, R-Texas, has been placing on the RFS this year.

So why do biofuel industry supporters continue relying just on EPA decisions just to hold the line on market share and risk caps on growth?

Why is it that Midwest ethanol plants try to ship ethanol to California to get a premium? It's because California and Oregon are the only states with low-carbon fuel standards. Only a handful of states mandate ethanol in fuel, including Missouri and Minnesota. The three largest states for corn and ethanol production -- Iowa, Nebraska and Illinois -- have incentives for ethanol, but no state-mandated levels.

I get it that rural states don't like to go crazy with mandates. But there are no oil derricks in Iowa while there are 41 corn-ethanol plants. What oil activity there is in Nebraska can't compete with the $5 billion state impact of biofuels.

Ethanol offset the economic pain in the Midwest during the recession, but four years now of slumping commodity prices are hitting state coffers, as well as farm families and rural towns.

A representative from Growth Energy, which lobbies for the ethanol industry, said at Commodity Classic the group was looking to grow ethanol demand by 2 billion gallons of domestic use by 2021. The group would like to see ethanol exports hit the 2 billion-gallon threshold as well.

Hitting 2 billion gallons more in ethanol production would basically lower stocks to use from 16.1% to roughly 10.7% using 2018-19 supply-and-demand numbers. Should some attention go to examining how state low-carbon fuel standards, or ethanol and biodiesel mandates, could do for corn and soybean demand?

As a representative of another ethanol lobby suggested to me, what if seven, ten or a dozen states in the Corn Belt formed a regional low-carbon standard or renewable-fuels mandate? A bigger question is, why aren't ideas like this getting more discussion?

Chris Clayton can be reached at Chris.Clayton@dtn.com

Follow him on Twitter @ChrisClaytonDTN

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