Will Biofuel Keep Pumping?

Matthew Wilde, DTN Crops Editor, and Todd Neeley, DTN Staff Reporter

A massive steel behemoth affectionately called "Binzilla" is more than a record-setting structure to hold corn at Golden Grain Energy. It symbolizes confidence in the ethanol industry by the plant's leadership.

Billed as the world's largest grain bin, Binzilla is a can't-miss landmark on the south side of Mason City, Iowa. It's 165 feet in diameter, 156 feet tall -- about the height of a 12-story building -- and can hold 2.2 million bushels.

As the bin and a new high-volume corn dump to fill it were being planned and built, uncertainty about the long-term viability of ethanol swelled in the United States.

The COVID-19 pandemic strangled the U.S. economy and forced people to stay at home, drastically cutting fuel demand. Many ethanol plants temporarily or permanently ceased operations. Some significantly cut production.

"During March and April of 2020, we experienced our worst ethanol prices in 17 years," says Chad Kuhlers, Golden Grain CEO. "Ethanol storage tanks filled because people weren't driving. Ethanol went from $1.30 per gallon, which was barely profitable, to 90 cents."

To curb losses, Golden Grain doubled its annual spring maintenance shutdown to two weeks in April 2020 and cut production in half for 40 days after coming back online.

COVID-19, though, is only part of the ethanol industry's recent, and potential, struggles. Several include:

-- The Trump administration's EPA generously approved dozens of small-refinery exemptions to the Renewable Fuel Standard (RFS), which slashed ethanol demand by millions of gallons. Reports recently surfaced the Biden administration also is contemplating granting relief to refiners.

-- Cash corn prices have more than doubled since last summer, leading to reduced profitability for ethanol producers.

-- Electric vehicles are being pushed by the Biden administration as part of its green-energy initiatives, which would lessen demand for fossil and renewable fuels to power internal combustion engines.

-- RFS biofuel blending requirements set by Congress sunset in 2022. The EPA will establish undetermined blending levels for 2023 and beyond unless lawmakers act.

Poet CEO Jeff Broin says a war is raging over the gas tank between the oil and ethanol industries about small-refinery exemptions.

"We've been battling the oil industry for over 30 years ... and the battle is heating up," says Broin, leader of the nation's largest ethanol producer.

FAITH IN THE FUTURE

Despite all the headwinds facing ethanol, Golden Grain leaders spent more than $10 million on its bin project, along with a new entrance to the plant to improve traffic flow. Kuhlers says they wouldn't have done the improvements if they thought ethanol's days were numbered.

"We believe ethanol will be around for the long term," he says. "We need to continue to make investments in the facility to make sure it will be around in the future."

Golden Grain started as a 40-million-gallon ethanol plant in 2004. It has since expanded, with production peaking at 127 million gallons in 2019.

The facility grinds about 130,000 bushels of corn a day, or 42 million bushels annually. Binzilla nearly tripled Golden Grain's corn-storage capacity.

Kuhlers says the recent upgrades provide much-needed corn storage, increase plant efficiency and bolster corn-buying flexibility.

Golden Grain can now better bridge times when farmers and elevators aren't shipping corn, such as holidays or during bad weather. The plant has the ability to buy and store 30 days of corn, up from 10 days, to better manage costs.

"People pretty much figured out the game and understood that if they didn't like the price we offered for corn on Monday, and if they didn't sell it to us by Friday, we would be more than happy to pay any price necessary to keep the facility operational," Kuhlers says.

Dave Sovereign, chairman of the Golden Grain Board of Directors, says the upgrades to the facility will ensure Golden Grain is a delivery point of choice for area grain elevators and farmers.

Sovereign, who farms near Cresco, Iowa, delivers a sizable chunk of his corn crop annually to Golden Grain. It's a competitive, year-round market that's a boon to farmers, he says. "It has really added to the farmers' bottom line."

Grain farmer Doug Nelson, Jackson, Nebraska, conservatively estimates ethanol demand adds 10 to 20 cents per bushel to the value of his corn. He regularly sells to Siouxland Ethanol, only a few miles from his farm.

Nelson expects the industry will continue to experience ups and downs, but not go away. It's too important. Nearly 40% of corn produced in the U.S. goes to renewable fuel.

"I don't expect a bed of roses during the next 20 years, but I think it has a great future," Nelson continues. "It's (ethanol) a big deal."

POLICY IMPLICATIONS

The RFS has been a major driver of ethanol-production expansion and rural economic development for more than 15 years. Industry officials expect the policy's future will continue to be marked by both uncertainty and opportunity.

Brian Jennings, American Coalition for Ethanol CEO, says ethanol will continue to play a role in reducing greenhouse gas emissions regardless of federal-policy directions.

He says the nation's energy and transportation policies likely will include a mix of the RFS and low-carbon fuel standards (LCFS) in the future.

"I think clean fuels will dominate the marketplace," Jennings says, noting low-carbon ethanol is market-ready, while electric vehicles still are years away from prime time.

The American Coalition for Ethanol has been part of an ongoing effort to explore the viability of a Midwest LCFS through the Midwestern Clean Fuels Policy Initiative. California's LCFS hasn't exactly been friendly to ethanol produced in the Midwest.

Early on, the state virtually excluded ethanol produced in the Midwest from entering the California market, declaring the fuel was more carbon-intensive than ethanol produced from sugarcane.

California regulators have since turned to E85, a blend of 85% ethanol and 15% petroleum, to achieve LCFS requirements.

While the industry says it wants to avoid a patchwork of state-level LCFS laws, it also recognizes the California law can't be allowed to define a discussion on a potential national low-carbon fuel standard.

"I think as more states focus attention on clean-fuel policies, it forces the Biden administration and Congress to pay attention to what these individual states are doing as they figure things out," Jennings says. "I don't think it takes a crystal ball to predict that we're going to have our challenges with implementation of the RFS no matter who resides in the Oval Office."

Most recently, the Minnesota Legislature began work on an LCFS bill that passed the House. Jennings says he expects other Midwest states to consider similar measures.

"In addition to seeing a bill reintroduced in Minnesota for next year's legislative session, I predict that in 2022, you have three or four or five other Midwest states (following suit)," he says, "Ohio, Michigan, Nebraska, Iowa may look at something like this. So, I really do feel like momentum is building."

MIXED SIGNALS

Jennings says the Biden administration's focus on electric vehicles has raised concerns in the ethanol industry.

"It's created a lot of anxiety," he explains. "It's got folks frustrated. But, I think what it signals to us is that we have to very aggressively engage the Biden administration on the near-term opportunities if they're genuinely focused on reducing greenhouse gas emissions."

The administration has sent mixed signals on its support for biofuels -- defending the industry in a Supreme Court case on small-refinery exemptions on the one hand and considering RFS relief to refiners on the other.

Geoff Cooper, president and CEO of the Renewable Fuels Association, says the industry continues to fight to make its low-carbon case to the EPA and now the Biden administration.

A recent study by Harvard and Tuft universities found that corn-based ethanol's carbon intensity is 46% less than gasoline. Some ethanol in today's market is 61% less, according to the study. Efficiency improvements and the adoption of new technology have contributed to a steady reduction of the life cycle carbon intensity of corn ethanol.

"We are doing everything we can to educate policymakers and regulators about the actual true environmental footprint of ethanol, Cooper says.

"We know that today's ethanol has a very attractive environmental profile. We could very likely have corn ethanol that on a net life cycle basis is zero emissions," he adds. "That's an ongoing challenge, educating folks about those developments. Washington, D.C., has always had a flavor of the month. Right now, the flavor of the month is electric vehicles. We think that's causing folks to maybe take their eye off the ball a little bit."

Cooper says if the goal is to reduce carbon emissions in the long term, the government should not dictate which technologies achieve it. Ethanol will need to play a major role to meet the Biden administration's goal of net-zero emissions by 2050, he says.

"Certainly, a lot of folks have been looking at electrification, but if they look at this issue in any depth at all," he says, "they quickly realize that it's going to take a lot more. You're not going to electrify 280 million light-duty vehicles overnight. It's just not going to happen."

OVERCOMING CHALLENGES

The ethanol industry has dealt with policy, environmental and financial challenges for years, Iowa State University economist Chad Hart explains. The pandemic and recent buzz concerning electric vehicles are just the latest issues to put the fuel's future in question.

The pandemic took a toll on the ethanol industry when profitability plummeted. More than 210 ethanol plants were operating before the pandemic, Hart says. He estimates there were 190 to 200 producing fuel in June.

"At times of financial stress, like any industry, there tends to be consolidation," he continues. "The ones missing are older, smaller and less-efficient plants."

As states gradually started to open up, and vaccine rates climbed, people returned to the open road and offices.

"When we look at ethanol now, things are looking good, but there are storm clouds on the horizon," says Hart, who studies the interactions between the agricultural and energy sectors. "People are starting to travel again. We've seen a surge in ethanol demand, but not quite at prepandemic levels."

Yet, ethanol is profitable again despite high corn prices, Hart says.

Golden Grain's average profit is about 16 cents per gallon across 17 years, according to Sovereign. This past June, the plant was operating close to historic profitability levels.

By mid-June, ethanol futures sold for about $2.50 per gallon, more than $1.50 per gallon higher than the spring of 2020, when COVID-19 kept people home.

Siouxland Ethanol also is back in the black and operating at full capacity (90 million gallons annually) after a rough spring of 2020, says Nelson, a member of its board of directors. The plant shut down for the month of April last year when demand evaporated. Siouxland's ethanol is primarily shipped to California.

"Things have perked up. We're making pretty good margins now," he adds.

CONSOLIDATION

Mark Fisler, managing director of Ocean Park Advisors, based in Los Angeles, says there will continue to be ethanol-industry consolidation. Ocean Park Advisors helps ethanol companies buy and sell assets, and has a front-row view of industry consolidation.

During the ethanol boom that started around 2000, farmers and their rural communities invested in ethanol plants as a means to improve corn markets and grow local economies.

Fisler says many of those farmer investors are older, meaning the industry will need to look to the younger generation to keep local plants operating.

"I don't see a good plan to get the shares out of the hands of the more advanced-age farmer into the younger farmer," Fisler says. "I'm not hearing the trend value-added agriculture investing coming from the new-age farmers. I'm not saying it won't happen."

Poet, based in South Dakota, recently acquired all the biofuels assets of Flint Hills Resources, of Wichita, Kansas. The deal increased Poet's ethanol-producing capacity by 40%. Its annual production capacity is now about 3 billion gallons.

Flint Hills sold six ethanol plants in Iowa and Nebraska, and two terminals in Georgia and Texas to Poet. Financial details weren't released.

Broin says the move highlights Poet's belief that ethanol is here for the long haul. And, he says it helps ensure the longevity of his business.

"These were the right assets (to acquire) at the right time," he explains. "We definitely have faith in this industry and the potential of biofuels and bioproducts to make a significant impact on the world in the coming decades."

If the nation is serious about reducing harmful greenhouse gas emissions, Broin says it will need to get more energy aboveground, such as from plants, than belowground.

"In the future, we believe more ag products will be used to replace petroleum products," he adds.

Carbon Capture Bolsters Ethanol's Future:

Multi-billion-dollar projects are in the works to sequester carbon dioxide (CO2) emitted from ethanol plants to make the fuel more green and help ensure the industry's sustainability.

At least three companies recently announced partnerships with ethanol producers to capture CO2 created during production, which would drastically reduce the carbon footprint of refineries and the fuel. Instead of CO2 being released into the air, it would be transported and stored underground.

Golden Grain Energy is one of more than 30 ethanol plants to sign on with Summit Carbon Solutions, based in Ames, Iowa. It's a subsidiary of Summit Agricultural Group, a diversified agribusiness operator and investment manager with operations in the U.S. and Brazil.

Summit is proceeding with initial engineering and working to get needed local, state and federal permits for its project. It includes installing CO2 capture equipment at ethanol plants in Iowa, Nebraska, Minnesota, South Dakota and North Dakota and burying more than 2,000 miles of pipe to transport CO2 from plants to North Dakota. It will be stored about 1 mile underground in saline geologic formations.

"Effectively, capturing CO2 from the fermentation process allows ethanol plants to cut their carbon footprint in half, putting them on track to produce a net-zero or even carbon-negative fuel by the end of the decade," says Justin Kirchoff, Summit Ag Investors president. "In our view, it will allow ethanol plants ... to compete in a low-carbon (energy) world. It will also enhance the long-term profitability of ethanol plants, enabling them to sell their ethanol into low-carbon fuel markets and receive a premium."

The cost of the Summit project is estimated at $4.5 billion. Start-up is slated for the first half of 2024. When finished, the company will have the infrastructure to capture and permanently store up to 12 million metric tons of CO2 annually.

Summit is paid two ways, according to Kirchhoff. It will receive 45Q federal tax credits worth $50 per metric ton of CO2 captured and stored annually for 12 years. It will also receive a portion of the premium received from partner plants from ethanol sold into low-carbon fuel markets such as California.

Golden Grain Energy CEO Chad Kuhlers says sharing a small piece of future profits to hopefully keep the plant in business to a good move.

"It will help us compete in low-carbon fuel markets that exist and continue to grow," he adds.

Navigator CO2 Ventures, based in Dallas, has plans for a 1,200-mile pipeline across five Midwest states to sequester CO2 from biorefineries and other industrial participants at a permanent site.

Catahoula Resources is working on a carbon capture and sequestration project at its ethanol plants in Hastings and Lexington, Nebraska. Legislation recently signed by Nebraska Gov. Pete Ricketts allows geologic storage of CO2 in the state.

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FOR MORE INFORMATION:

-- Golden Green Energy: www.ggecorn.com

-- Renewable Fuels Association: ethanolrfa.org

-- Siouxland Ethanol: siouxlandethanol.com

-- Summit Carbon Solutions: www.summitcarbonsolutions.com

-- Watch a time-lapse video of Binzilla construction:
www.youtube.com/watch?v=UkokU1Iw2Nc

-- Follow Matthew Wilde on Twitter @progressivwilde
-- Follow Todd Neeley on Twitter @DTNeeley

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