Thursday, December 31, 2009
Ethanol’s Blend Wall: An Initiative With Many Issues
Marathon runners speak of “hitting the wall” when they cannot go any farther. That is the current situation for ethanol, because 14 billion gallons is the 10% blending limit for the 140 billion gallons of motor fuel used in the US. As a run up to the anticipated “blending wall” the corn and ethanol organizations have asked for the blending limit to be raised to 15% and the US Environmental Protection Agency indicated earlier this fall that it would rule on that request by June of 2010.Increasing the blending limit from 10% up to 15% or any intermediate percentage would require more corn to make ethanol, and create an initial demand for ethanol produced from biomass. But those have impacts on US agriculture and Iowa State University economist Bob Wisner uses his January newsletter for the Agricultural Marketing Resource Center to evaluate those implications to “petroleum refiners, ethanol producers, the soybean industry, the livestock and poultry sectors, and the entire corn-related sector of agriculture.” He says the EPA’s decision process received unanimous support from the ethanol industry, but there was varying degrees of support from other stakeholders.
Wisner says a jump from 10% ethanol or E-10 to 15% ethanol or E-15, would be a 50% increase in the potential market, and would replace 5% of the petroleum usage. For corn, a move to E-15 would raise corn demand from 5 billion bushels to 7.5 billion, and when adjustments are made to exchange corn for DDGS, Wisner believes there is a need for 11 to 12 million more acres of corn. That would be a substantial impact on the fertilizer, seed, and crop protection industries, as well as creating a demand for more equipment and ripple through livestock industries. While the Congressional intent was to shift ethanol toward biomass as a feedstock, that industry is in its infancy and Wisner says it will not be ready to assume the bulk of the added market demand when EPA approves a higher blending rate, whether that is E-15 or the E-12 on which some money is being wagered. Wisner says some of the other signals EPA is making is that any increase in the blend rate may only be approved for vehicles of model year 2001 or newer, and that would limit the demand since a large percentage of the motoring public would not be approved for using premium ethanol.
Another issue is where the pumps will come from for blends above 10% ethanol, and Wisner says there may be quite a few E-85 pumps, not being fully used, that are available. That would further reduce ethanol demand if there are fewer pumps available to dispense E-85. Another issue originates in the states that mandate the use of E-10 to address air pollution issues, such as California and Florida. E-15 is not approved to do that. Additionally, a significant obstacle in the success of the plan is a distribution system that has to handle E-10, E-85, and whatever the new blend might be. That means additional pumps at gas stations, as well as tank trucks, and infrastructure backward up the distribution system that will only be used for putting ethanol in gas tanks on vehicles that are newer than the 2000 model year.
Such difficulties may be obstacles to the future of cellulosic ethanol believes Wisner, and make potential investors too cautious to aggressively expand that sector of the market. And he adds, “it could significantly retard expansion of the ethanol market until infrastructure is able to adjust to the higher blend and changes needed in both retail and distribution channels to accommodate additional formulations of gasoline.” That, he says, would not be a solution to the blending wall issue.
Concerns about ethanol profitability also enter the discussion, according to Wisner, if E-85 becomes the primary blend from cellulosic feedstock. That would happen because of the reduced energy capability of E-85, causing that fuel to be sold at a lower price than unleaded gasoline. That would reduce income for ethanol refiners, lowering profitability and discouraging further investment in the industry.
On a positive note, the Iowa State economist quotes an ethanol industry source that 59% of the nation’s gas supply could qualify for E-15 blends, which would be a significant growth opportunity, but that includes all vehicles regardless of year manufactured. Such growth would require 965 million more bushels of corn, and adjusting for DDGS feeding, that would require 4.6 million more acres of corn at current yields, or 4.3 million in 2015 with trend yields.
Summary:
The pending EPA decision on whether ethanol blends can be raised from 10% to 15% have significant economic impact for many industries beyond agriculture. The issue will not only require more corn acreage, but will potentially be troublesome for the distribution system, particularly if some models of automobiles are not eligible to use the higher ethanol blends. The decision will also have significant pluses and minuses for the profitability of the ethanol industry, some of which may not be obvious. And that extends to the fledgling cellulosic ethanol industry as well.
Posted by Stu Ellis on 12/31 at 01:13 AM | Permalink
Comments
Posted by: Jib at January 5, 2010 3:03PM
Sucked in by the rumor…
Ethanol Producer’s Magazine as posted November 3, 2009 at http://ethanolproducer.com/article.jsp?article_id=6091 states; “Recent reports that U.S. producers have been exporting ethanol to Brazil have been nothing more than rumors, according to Joel Velasco, the North American representative for Brazil’s Sugarcane Industry Association (UNICA). “There have been no imports into Brazil,” he said. “It’s still not competitive to deliver undenatured ethanol from the U.S. to Brazil.””
The posting goes on to state; “Doug Newman, international trade analyst at the U.S. International Trade Commission, said ... he has not received any reports of ethanol being exported from the U.S. to Brazil, he said, and added that Brazil’s 20 percent import tariff would make it difficult to export U.S. ethanol at a profitable rate. He also questioned whether any U.S. producer possesses the necessary permits to handle undenatured ethanol.”
Sorry for the error.
Jib aka Gibberish
Posted by: Jib at January 20, 2010 3:03PM
Being unable to grasp his market concept, a stock broker tried to reduce my anxiety by telling this story; “Jib” he said, “The problem of your comprehension is more linked to the natural of the stock industry than the size of your marble. See the industry communicates to the public through stock brokers and stock analysis. The broker is a generalist. He wants to learn more about everything. But the mind can only hold so much. So the broker forgoes details on a subject in order to tough on more subjects. In his quest, he ends up learning less and less about more and more till he knows nothing about anything. The analysis is a specialist. He wants to learn everything about his area of expertise. But the mind can only hold so much. The analysis is willing to forgo new subject matter in order to learn more details about a part of a subject. In his quest he ends up learning more and more about less and less till he knows everything about nothing. So, Jib, because of your association with brokers and analysis and you desire to know “anything about anything”, you are going to know “nothing about nothing”.” After relaying that story he hung up.
In a lot of respects I guess he was right. What started out several years ago as a quest to understand a little more about grain marketing, last night had me trying to get a feel for corn ethanol demand for the 2010-11 marketing year. The review of Dr. Wisner’s comments led to RFA to look at current and projected ethanol production capacity, to the EPA for a review of the Renewal Fuels Standard, to the Department of Energy to look at projected fuel consumption, to the price of sugar to see how cheap Brazil can make ethanol. In my know nothing about nothing opinion, it looks like the “high” price of sugar will do more for ethanol production for the coming marketing year than the increasing the percentage of ethanol in gasoline. The EPA set their mandate of ethanol consumption at 8.01% for 2010. The Energy Department expects 138 billion gallons of gasoline to be used in 2010. These two estimates would place ethanol use at 11.1 billion gallons or 86% of the 2010 Renewal Fuel Standard. This equates to about 4.17 billion bushel of corn (The corn use needs to be prorated with 2011 use as 4.17 billion bushel is the first quarter of the 2010-11 marketing year.) Meanwhile future world sugar prices look to be in the $0.21 per pound range. About 141 gallons of ethanol can be made from a ton of sucrose. That would put a gallon of ethanol at $2.98 per gallon. Next fall’s futures price for ethanol is around $1.85 per gallon. Brazil may be better served by importing ethanol and exporting sugar. They have been buyers of US ethanol this year. It sure looks like increased corn use for ethanol is going to be more dependent upon exports than domestic use. Oh by the way current on line ethanol plants, at 110% of nameplate production, could use around 4.65 billion bushels of corn.
My slogan may have to become; “The quest to know everything about everything results in knowing nothing about nothing.”
Happy New Year!
Jib aka Gibberish