Should Ethanol Go Back To Business As Usual After COVID-19?
At the start of the coronavirus pandemic, ethanol producers feared the worst: a world indefinitely stuck at home. As Americans hunkered down, gasoline demand across the country plummeted.
Ethanol industry leaders issued warnings that the financial repercussions of widespread lockdowns could be significant to plants across the country. They later reported half of the nation’s facilities were forced to shut down.
Most ethanol plants have since reopened, and losses so far are lower than initially feared. But the sector’s slow recovery has some questioning if it’s in the U.S. ethanol industry’s best interest to continue making as much fuel as before the pandemic.
When Tony Leiding, operations manager at Trenton Agri Products, an ethanol company based in Wichita, Kansas, first heard of the coronavirus, the news out of China felt far away. But calls from his ethanol marketer concerned him, so he started planning for the potential impact on business.
But the moment it was crystal clear for Leiding that the virus was coming to Nebraska? When the NCAA announced in mid-March that it was canceling the March Madness basketball tournament, just weeks before the CHI Health Center arena in Omaha planned to fill thousands of its stadium seats.
“I know it sounds crazy, but if they cancel the NCAA basketball tournament, I mean, that's a big deal, right?”
Trenton Agri Products has an ethanol plant in Trenton, Nebraska. Leiding is used to the ups and downs of commodity markets. But he’s managed to keep the place running 24 hours a day, seven days a week since 2004.
“We've always been able to sell our ethanol, even if it was at a slight loss,” he said. “But when COVID came about … the refiners said, ‘We're full, we can't take any more.’”
For the first time in his career, Leiding had to decide whether to stay open or idle the plant. He ultimately decided to cut production by 60% until around mid-May. That way, nobody got laid off, nearby livestock producers could still purchase feed, and local corn growers could still sell their bushels.
About half of Nebraska’s 25 ethanol plants couldn’t find a way to stay open, and two are still closed. But the ethanol industry’s financial problems started long before COVID-19.
“No one's disputing that the ethanol industry was going through a very difficult period in 2019 and early 2020,” said Scott Irwin, an agricultural economist at the University of Illinois.
The debate over why the industry ended up in such a financially vulnerable place mostly falls into two camps.
“Was the dire straits of the U.S. ethanol industry due to adverse policy decisions by the EPA under the Trump administration … or was it due to an industry that had overbuilt ... and was suffering from an oversupply situation?”
Too much production
The main reason feels obvious to Irwin: The U.S. ethanol sector has been producing too much for years. Following a “highly profitable period” from 2013 to early 2015, Irwin says some companies were excited by the prospect of gasoline with 15% ethanol catching on, up from the typical blend of 10% ethanol.
An expansion of over a billion gallons of extra capacity followed, but the boom never took off.
“The fact that the U.S. ethanol industry losses in 2020 were larger pre-COVID than post COVID … that tells you all you need to know,” he said.
Roger Berry, administrator of Nebraska’s ethanol board, sees it differently.
“There's been a lot of other things that have made the ethanol industry not as profitable as what it should be here in the last 3½, 4 years,” he lamented. “And a large part of that is what's called small refinery exemptions.”
The Renewable Fuel Standard legally requires oil refiners buy and blend a certain amount of ethanol into their gasoline. The EPA controls that ratio, but the agency can also choose to waive the rule for small oil companies.
The Trump administration has been pretty friendly to oil companies. The EPA granted a little over 80% of waiver requests in 2017 and '18.
“Put that on top of the extreme reduction of driving during the height of the COVID, and it really was economically damaging to our plants here in the state and across the nation,” Berry said.
Expand or close
Despite the uncertainties facing the industry right now, ethanol advocates like Roger Berry say there’s room for more growth. He thinks higher ethanol blends could help the U.S. transition away from gasoline.
“The day will come when we're all driving electric vehicles,” he said. “But that's going to take time. However, we offer a fuel right now.”
Scott Irwins thinks that’s a losing battle. “Where are the plans for any new ethanol plants? None,” he deadpanned. “And there are renewable diesel projects everywhere in this country.”
He said some closures triggered by COVID-19 could and maybe should be the start of a more scaled-back industry. “There's no death knell, I just think that it's gonna be this kind of long grinding slog to kind of wring spare capacity out of the industry,” he said.
“I mean, I think that's the future of the U.S. ethanol industry.”
A recent legal challenge could dampen the EPA’s flexibility in approving exemptions going forward: In January, the 10th Circuit Court of Appeals struck down three of those waivers, saying the agency overstepped its authority in granting them.
The EPA may wait to decide on pending small refinery exemption applications until petitions by refiners following the 10th Circuit decision are fully resolved. That could drag out past the transition of power from President Donald Trump to President-elect Joe Biden.
“The EPA needs to pay attention to those 10th Circuit Court decisions,” Berry said. “If we come about with a new EPA, I do think we'll see them paying attention to that and realizing that the way it's been done in the past is against the law.”
Blending mandates, the ethanol-to-oil ratio set by the EPA at the end of each year, could also impact ethanol revenue in 2021. A lower mandate might drain even more income for ethanol plants at a time when they’re clinging to every dollar of revenue they can muster.
“I think a lame duck Trump administration is very dangerous to the health of the RFS mandates,” Scott Irwin said.
Tony Leiding doesn’t expect to make a lot of money this year, but he sees hope in a continued industry recovery over the next year. For now, he’s just trying to get his business through the winter.
“If you're going to be in the ethanol or energy industry in general, or any commodity industry, you just have to be tough and hang in there,” he said.
“It really just boils down to, will we find ways to prevent the spread of COVID? Will there be a vaccine? And can we avoid any lockdowns or shutdowns? If we can do any of those, that’ll certainly provide some certainty going forward.”
Follow Christina on Twitter: @c_c_stella
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