Producers Panic as Ethanol Mandate Loses Support

What's next for ethanol producers?

Jan 4, 2014 at 1:23PM

This article was written by Oilprice.com -- the leading provider of energy news in the world

Ethanol producers are panicking amid speculation that the ethanol mandate could be drastically reduced or scrapped entirely this year as the biofuel loses its allure and bipartisan allies and former friends team up against it.

December saw California Democrat Dianne Feinstein—a renewable fuel champion--coordinate efforts with Oklahoma Republican Tom Coburn to come up with a Senate bill to get rid of ethanol from the Renewable Fuel Standard (RFS), citing fears that corn-based fuel production mandates will harm livestock producers.

In November, Washington proposed cutting the biofuels mandate for 2014 by 16% to 15.21 billion gallons. This would be the first cut in biofuels requirements, which were ideally set to grow each year with incremental increases in renewable fuel targets laid out in a 2007 law.

For renewable fuel targets, this represents a major setback because not only is 15.21 billion gallons for 2014 much less than the originally intended 18.15 billion gallons, it is also less than this year's mandate of 16.55 billion gallons.

Two years ago the Environmental Protection Agency (EPA) approved the E15 blend, which contains 15% ethanol and 85% gasoline, for vehicles manufactured in 2001 or later. There has been little progress toward widespread use of E15 though, and today's blend is commonly E10.

The problem is that the RFS set its parameters too far ahead and predictions are a tricky thing. Flexibility is necessary and this is being learnt the hard way and will certainly have repercussions and this initial lack of flexibility—of RFS ranges—was a policy misstep on the part of the Environmental Protection Agency (EPA).

The problem is that the current and future ethanol mandates were created back in 2005 with the Renewable Fuel Standard (RFS), at a time when gas demand predictions were expected to be different. Now we have better fuel economy and demand for gas that is increasing slower than forecast.  In 2007, it looked like gas demand would continue to rise every year; instead, it peaked in 2008.

Beyond that, poultry companies are going bankrupt due to rising prices of feedstock as crops are diverted to ethanol. The rising costs of farming and egg production are taking their toll on states like Minnesota.

On the other side of this divide we have the biofuels producers for whom uncertainty is rising fast as a resolution on the ethanol mandate looms. States like Iowa are leading the lobbying here because they have been reaping the benefits of all that demand for corn. This has come along with new jobs. Iowa will certainly baulk at the proposed cuts because the bulk of US biofuels are made from corn, with soybeans, grasses, crop waste and Brazilian sugarcane playing lesser roles.

The Iowa Renewable Fuels Association is balking at the new bill before the Senate. The recent launch of a new wet mill and three cellulosic ethanol plants slated to begin production in 2014 had raised high hopes of further growth.

"Iowa ethanol production was up in 2013, but not enough to round the decimal point. With the record U.S. corn harvest in the bin and new production facilities coming on line, there is hope that Iowa can once again expand ethanol production," said Monte Shaw, executive director of the Iowa Renewable Fuels Association. "But hanging over that potential like a gray cloud is the EPA proposal to cut the RFS (Renewal Fuel Standard)."

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