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Good Call On Ethanol

by Ken Root

On the day following the EPA ruling on biofuel volume for 2016, no one seems happy.  That may be the best sign that the agency’s tortured two year delay, in setting the volume required to be blended with gasoline, was fair to all parties.  If either the oil industry or ethanol producers had been heavily favored, there likely would have been a move to create a legislative axe to fix the problem.

It is remarkable to think that we are fifteen years into the ethanol century and the most dynamic change in modern agricultural history.  Ethanol was a child of politics that was fostered by rural and agricultural people who put up money to build the first refineries to convert corn to fuel.  Then the industry consolidated and big players came in, some survived and some famously failed.  The legislative lobby for ethanol rose to prominence and effectively challenged the oil industry to put the 2007 Energy Act in place.  Since then, it has been a fight for dominance or survival, depending on your side of the table.  The EPA ruling really wasn’t about science or consumer preference, it was about political influence of competing industries.

Farmers can be great lobbyists as they carry their political convictions close to their bibles.  When a politician hears what a farmer really wants it has to be taken seriously since the farmer won’t forget the legislative action before the next election.  

Who really won in the EPA decision to back off the 2007 volume numbers but increase the required blending above initial reductions proposed last May?  I say it was farmers, refiners and all who live in communities where corn is grown.  The floor under corn prices has been sealed against further erosion and that boosts everyone, whether they like ethanol or not.

The ethanol lobby also won as Congress and the Obama Administration both leaned toward the biofuels industry.  Agriculture held politicians to their pledge of more renewable energy even when the price of gasoline is relatively low and likely to stay that way for awhile.  Farmers contributed to the current status by producing two huge corn crops so the “food or fuel” argument is currently dead.  

The biofuel industry is still mostly about “corn based ethanol” as advanced biofuels, especially cellulosic ethanol, is far behind projections made over the past ten years.  There are two plants now scaled up to produce ethanol from Material Other than Corn (MOG) but both are still prototypes of what may come in future years.  Expanded biodiesel production is not viable without subsidy so the real base for biofuel is abundant, cheap corn.

I do take issue with those who argue that biofuels are favored by consumers and have some sympathy for the oil industry which claims it has to make the biker, boater and motorist take an ethanol blend.  Gasoline, blended with ethanol or not, is a very price-sensitive commodity to most consumers who seek out the cheapest filling station.  However, old habits and negative publicity about ethanol make literally everyone prefer straight gasoline over a blend, if the price is similar.  The oil industry tries to hide the fact that almost all gasoline has an ethanol component and sets higher octane at a higher price to infer that it is ethanol-free.

I can’t leave out the naysayers from the livestock industry who broke ranks with others in agriculture when corn prices started up in 2006.  The poultry industry has cried “fowl” the loudest as they are the furthest removed from production agriculture.  Beef and pork producers have been conflicted as many have an interest in corn and could shift their income toward grain and away from livestock in years with a tight feeding margin.  I think it is hypocritical of animal agriculture to begrudge crop farmers the opportunity to have high priced grain.  We have seen almost ten years of markets under the influence of ethanol and both sides have had lean times and good times.  The cheap grain policy of the 1980’s made everything cheap but required the taxpayer to subsidize every bushel that came to market.  The ethanol subsidy is now gone and only the Renewable Fuel Standard remains.  Further need to capitulate to livestock feeders seems unlikely.  

The ethanol industry has matured.  No longer a struggling child that requires government protection, it is now an active adolescent, pushing the envelope and annoying its elders but still counting on shelter and protection in case the trouble it causes gets bigger than can be handled.  At some point, the government has to get out but when that day comes depends on many factors from terrorism to technology.  Get a good seat, it should be quite a show.