Expert Sees The United States Fuel Ethanol Industry Transformation by 2025

A report issued from CoBank’s Knowledge Exchange Division says the ethanol industry may have to diversify itself in the future. Kenneth Scott Zuckerberg, CoBank’s lead grain and farm supply economist, quoted the U.S. Energy Information Administration to say the industry already had 1 billion gallons of excess capacity at the start of 2020. Analysts projected that to rise to 3.9 billion gallons at the end of this year before it settles to 2.4 billion gallons of overcapacity at the end of 2021.

CoBank, part of the Farm Credit System, is one of the largest private providers of credit to the U.S. rural economy. With more than $125 billion in assets, the bank delivers loans, leases and other financial services to agribusiness, rural infrastructure and Farm Credit customers in all 50 states.

Ashwin Raman, vice president of communications and education for the Minnesota Bio-Fuels Association in Minneapolis, said he had seen the CoBank report but hadn’t heard of any consolidation plans in Minnesota.

“I can’t say we’ve heard anything from producers in Minnesota,” Raman said. “All are basically resuming production after a few months, with transportation increasing. I know they’re online, producing and trying to make up” revenues after COVID-related demand declines.

Brian Jennings, chief executive officer of the American Coalition for Ethanol, based in Sioux Falls, S.D., said the report is consistent with what those running ethanol plants already know. He said said the three-phase restructuring might now happen.

“I think it’s premature to declare that we’ve seen peak exports of ethanol,” he said. He agrees 2020 and 2021 exports will be down from the peak in 2018, but there are “massive markets” that could develop. China is one, if the U.S. can get past “this ridiculous trade war.” Mexico, Canada and Brazil will continue to be export destinations.

He also said the report authors appear to have “overlooked or chose not to consider” low-carbon fuel policies in California that could drive demand. He said the western Corn Belt can take advantage of those policies for premium prices of 1.7 cents a gallon. If those policies were adopted by other states or the federal government, the prospects for ethanol improve.

Export Limitations

Zuckerberg said strong ethanol export growth would help reduce the excess production, but current projections “don’t support such an outcome.” Brazil imports U.S. ethanol but has increased trade access to China and is shifting some cane sugar production to ethanol — increasing production faster than the U.S.

Meanwhile, EIA data indicated that as of June 12, U.S. ethanol production rose .5% or 4,000 barrels per day, from a week earlier, to 841,000 barrels per day — equivalent to 35.32 million gallons daily and a 12-week high. Production was 22.2% below the same week in 2019, due to COVID-19.

U.S. annual production had been 15.8 billion gallons in 2019, matching consumption, the CoBank report said. But the year ended with a surplus equating to 6.2% of “nameplate,” or maximum, capacity. From 2013 to 2019, the industry grew plant production — either with new plants or technology — by 23%, while demand increased only 11%.

As COVID-19 travel restrictions cut demand, that will force the U.S. ethanol industry to “transform its business model to create more value and improve its operational efficiency,” the report said.

Consolidation Likely

CoBank predicted the industry will consolidate, leading to larger and more financially stable companies with diversified ethanol co-product offerings by 2025. “While ethanol remains an attractive business with long-term potential, the industry will need to evolve and diversify beyond fuel ethanol,” says Kenneth Zuckerberg, CoBank lead grain and farm supply economist.

That diversity will include higher-margin co-products like high-protein distillers grains for animal feed and liquid carbon dioxide for refrigeration. It will include beverage-grade alcohol and other industrial products, Zukerberg said. “COVID-19 led to businesses shutting down and people staying at home, causing significant ethanol demand destruction,” he said.

The report said the ethanol industry initially responded by cutting production nearly in half from mid-March to mid-April. CoBank doesn’t expect a full demand recovery in the near-term because of high unemployment, reduced attendance at public gatherings and more people working from home.

The lower “run-rate” fuel demand on top of the excess capacity will result in some “rationalization” of capacity. “Weaker players with less efficient technology, higher leverage, high operating costs, and an inability to attract new investment capital will be forced to exit through consolidation or plant closures,” Zuckerberg says.

3-Stage Adjustment

By 2025, the U.S. ethanol industry is likely to undergo a “three-stage transformation,” Zuckerberg said. There will be “fewer, well-capitalized players with diverse revenue sources.” These could include current co-products (e.g., distillers grain for feed, corn oil for biodiesel and liquid carbon dioxide for freezing and chilling and for carbonated beverages), as well as other products being developed (e.g. high protein distillers grains or further distillation for enhanced product purity).

The transformation could be headed off by an industry-wide government bailout, or if the economy recovers faster than expected, Zuckerberg said. Also, low loan interest rates would allow some weak operators to continue “without the need to transform.”