Some Relief for US Ethanol
The United States began its so-called Renewable Fuel Standard (RFS) program in 2005 to help reduce the country’s reliance on foreign oil. The program lays out a plan to increase the amount of renewable biofuel—including ethanol, biodiesel, and other types—to be blended with gasoline and other petroleum fuels, until 2022 when total biofuel blending was to top out at 36 billion gallons. As gasoline consumption has stagnated in recent years, that limited the amount of ethanol needed. Due to restrictions on blending ethanol into gasoline above 10%, or E10, ethanol consumption has been effectively capped at about 14.5 billion gallons a year. Last year, the US consumed 14.42 billion gallons of fuel ethanol, the Energy Information Administration says.
US ethanol production (green bars) and consumption (blue bars) shot up with the introduction of the Renewable Fuel Standard program in 2005. New government proposals aim to keep that momentum going.
In recent years, oil refineries increasingly have claimed financial hardship to be exempted from ethanol blending, which farmers and ethanol producers say has cut into demand. Ethanol prices hit a 13-year low in November 2018 and haven’t recovered much since. Both ethanol consumption and its blend rate declined in the US in 2018 from the previous year, believed to be the first such declines in some time.
In response to the ethanol market distress, the Environmental Protection Agency announced a plan to exceed the 15 billion-gallon blend cap established by the RFS. The plan has pleased neither the oil companies, which prefer to sell gasoline over ethanol, nor farmers, who argue the assistance doesn’t go far enough. Demand for ethanol would increase by an estimated 770 million gallons under the EPA proposal, just over half what farm groups had hoped for. The additional blending amounts would be allocated among petroleum refineries that hadn’t been granted ethanol-blending exemptions.
The amount of US corn diverted to making ethanol has flattened in recent years. Corn farmers and ethanol producers want to see growth restored; oil interests are opposed.
In another offering to corn farmers and ethanol producers, many of which are located in Iowa and Nebraska, the Trump administration proposed rolling back barriers to producing gasoline blends with as much as 15% ethanol, or E15. The move would also allow the use of more advanced biofuels as prescribed by the RFS law, such as cellulosic ethanol and ethanol derived from sugarcane, blending of which has been limited by the E10 blend wall. (Brazil’s ethanol, made from sugarcane, is considered an advanced biofuel and is imported by California to satisfy that state’s stricter environmental rules.)
It’s unlikely E15 will become universal in the US in the near future, even though vehicles manufactured since 2001 are supposedly able to handle the higher ethanol content. More probably, ethanol concentrations that are incrementally higher than 10% will be marketed in some parts of the country, such as the Corn Belt, where gasoline stations are outfitted to dispense the more highly volatile fuel.
What will be the impact of these various plans to boost ethanol use on corn markets? The US currently processes 5.4 billion bushels of corn into ethanol, representing some 35% to 40% of all corn produced. Another 770 million gallons of ethanol would require 287 million more bushels in corn feedstock, which represents 13.5% of US corn 2018/19 expected ending stocks.
Increasing the blend rate above 10% ethanol also could consume more corn—270 million more bushels for each 0.5 percentage point increase. Were the US to advance to E15 nationwide, the impact on corn would be vast. This would require a nearly 20% increase in corn production, above the 2019 crop estimate, an additional 16 million acres dedicated to growing corn, and an allocation of 59% of the expanded crop to ethanol processing. The additional corn acreage requirement would necessitate a shift in area away from crops like soybeans, wheat and cotton, limiting the supply of those commodities.
The US exports about 1.7 billion gallons of its ethanol, or about 10.5% of the total. This tree map shows the principal destinations broken down by continent (colored sections) and countries.
US ethanol processing capacity, currently at 16.87 billion gallons, also would need to increase to supply E15 nationwide. After accounting for current excess capacity of about 2.45 billion gallons, the industry would still need to find a way to produce an additional 5.6 billion gallons. Alternatively, the US could fill some of its E15 requirements with imports, including from Brazil, which also would satisfy some of the RFS law’s requirements for advanced biofuel use.
China Struggles to Reach E10
China, currently the fourth-largest ethanol producer and consumer, has big expansion plans. Its most recent five-year plan for the nation’s economy, announced in 2017, targeted blends of 10% ethanol in gasoline supplies nationwide by 2020. While some areas of the country have claimed to be in compliance, China as a whole can only hope to achieve an average national blend rate of 3% to 3.5% by next year.
The reasons behind China’s drive to ethanol are the same as in other countries—reduce rampant air pollution, achieve greater energy independence, and support domestic agriculture. In addition, China last year revised higher its corn-supply estimates to suddenly show a huge stockpile of the grain—the USDA estimates Chinese corn stocks will be 196 million tonnes at the end of 2020, four times as much as in the US—which could be put to use as feedstock for making ethanol. Slowing that momentum, in part, is China’s reluctance to allow foreign investment and ownership in grain ethanol production, which has limited capital available to expand production, storage, and distribution infrastructure.
Ethanol production capacity is currently 5.258 billion liters, but will need to reach at least 19 billion liters—which would eat up 39.6 million tonnes of corn per year—to meet the nationwide E10 goal. The USDA estimates Chinese ethanol production will be 4.311 billion liters this year, its highest level so far.
Until 2015, ethanol imports were banned in China, and trade continues to remain rocky. The ongoing trade dispute with the US has pushed up import duties on denatured ethanol to 70%. Imports of fuel ethanol are expected to reach only 103 million liters in 2019, down significantly from the 759 million liters imported in 2018, mainly due to tariffs on US ethanol and expanded domestic production.
Increasing imports from the US or Brazil could help fill the gap in Chinese ethanol supplies. Still, it remains to be seen whether Beijing will place a higher priority on getting to E10 as quickly as possible, which would likely involve greater imports and foreign capital investment, or if the country prefers to go it alone by building out its domestic industry.
Brazil Ready to Expand Ethanol Production
Brazil, which primarily uses sugarcane to make ethanol, has become the second-largest producer and exporter of the alternative fuel, after the US. Persistently low world sugar prices has encouraged this growth, and last year Brazil allocated a record 65% of its sugarcane for ethanol production.
The country’s new RenovaBio national biofuel program is intended to draw additional investment into the sugar-ethanol industry through tax incentives and loosened regulations. This could spur even more sugarcane planting—Brazil already is the world leader in sugar—and an expansion of ethanol processing infrastructure. RenovaBio incorporates CBios, a carbon-credit-trading system modeled after California’s Low Carbon Fuel Standard program, to help draw investment.
The bulk of Brazil’s ethanol is used domestically, mainly as fuel. This chart shows monthly consumption levels for 2019 (blue line with markers), compared with previous years’ levels (other blue lines).
The bulk of Brazil’s ethanol is for domestic uses, but that could change, especially if China should decide to boost imports. Flex-fuel vehicles make up most of Brazil’s national vehicle fleet, including cars that can run on 100% hydrous ethanol (E100). Gasoline in Brazil is routinely blended with 27% ethanol (E27). Some 34.4 billion liters of ethanol are currently produced, of which over 90% is used for fuel, and production could as much as double over the next decade, according to some industry estimates.
Ethanol expansion could increase Brazil’s competitiveness on the international ethanol market. Sugarcane ethanol is cheaper to produce than corn ethanol, and sugarcane is seven times as efficient as corn in terms of the energy required to produce it compared to the energy delivered by consumption. In 2019, Brazil’s ethanol exports totaled 1.8 billion liters. Included in that is about 245 million gallons (927 million liters) that Brazil sent to California to meet fuel standards. The production of sugarcane-derived ethanol has a lower greenhouse gas impact than the production of corn-derived ethanol.
About 5% of Brazil’s ethanol is exported. This tree map shows the major destinations by continent (colored sections) and countries. Plans to increase investment in Brazil’s ethanol industry are expected to boost the country’s competitiveness on the international ethanol market.
If China were to turn to Brazil to supply ethanol, the South American country would need to increase its own production by about 14.1 billion liters, an amount that seems doable given the country’s major investment plans for the industry. That would require Brazil’s sugarcane crop to increase by 45%, or some 281,000 tonnes, assuming the share of the crop allocated to ethanol processing remains at 65%.
The US, China, and Brazil are the major players in the global ethanol industry, and as they adopt pro-biofuel policies we can expect more processing of both corn and sugarcane into ethanol globally. (The EU also is a big biofuel producer, mainly biodiesel, but is mostly self-sufficient.) Additional market growth also can be expected as smaller parties like India further integrate biofuels into their economies.
In the coming years, the US will continue to grapple with contending interests between the ethanol and oil industries, which could hold significant consequences for corn production and trade. In China, the success of the biofuel sector will rest upon the government’s ability to attract investment and deliver the infrastructure required to produce enough ethanol to meet the country’s E10 goals. Otherwise, the country would need to import ethanol from the US and Brazil, but this wouldn’t have the added advantage of drawing down China’s big stockpiles of corn. Big ethanol expansion plans in Brazil could position that country to fill China’s demand, should the occasion arise. As Brazil’s RenovaBio program gets underway, the South American country seeks to expand ethanol production, which would increase its competitiveness in the international market.
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