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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Jay Brunson invokes Willie Nelson when he considers the strategic challenges facing ethanol producers: "Mama, don't let your babies grow up to be ethanol producers." A challenging business during the best of times, the loss of federal subsidies and sharply higher corn prices have made profitability elusive, if not impossible.
Brunson, Industrial Info's vice president of research for Alternative Fuels, said that the outlook for corn ethanol is grim, and the prospects for cellulosic ethanol is worse.
"Corn ethanol has been stagnant for a few years," he said in an interview. "There was a brief period of active construction of corn ethanol plants when a federal tax credit of 52 cents per gallon was available. But those tax credits ran out at the end of 2011. Today, the U.S. has about a dozen operating plants that are either idled or have choked down their production. The demand is there--production levels are federally mandated--but ethanol can't be produced economically right now."
A federal Renewable Fuel Standard (RFS) requiring that each gallon of gasoline contain 10% ethanol pushed ethanol production capacity to about 14 billion gallons per year. Losing the tax credit lowered the profitability of ethanol production. But producers really got hammered by last year's flooding and drought, which damaged about 20% of the nation's corn crop. That double whammy led to a doubling of corn prices--to about $8 per bushel.
"With corn at $8 per bushel, no federal tax credits, and ethanol plants costing $2.25 to $2.50 per gallon to construct, the economics don't work," Brunson commented.
He said poor economics are why no new ethanol refineries are being built today, and dozens of planned projects have been cancelled or placed on hold. "We have about 200 ethanol facilities. If all of their idled capacity came online, it would increase annual ethanol production by about 1 billion gallons per year--to 15 billion gallons. That's about all we'll need for the next three to five years, unless ethanol refiners are able to increase the mandate for ethanol content in gasoline." He sees that as unlikely, because petroleum refiners are against increasing the ethanol content of gasoline to 15%. And an increasingly budget-conscious Congress means the return of tax credits is unlikely.
To continue operating in a difficult market environment, ethanol producers are "trying to squeeze more value out of each kernel," Brunson said. Some are producing more dried distillers grains (DDG), a high-protein by-product of the ethanol production process that is an additive to livestock food. Others are investigating the viability of making a multimillion-dollar addition to ethanol refineries to produce corn oil from DDG, which could be sold to biodiesel producers as an alternative to soybean oil. Still others are looking into capturing the gases given off during the ethanol production process--chiefly carbon dioxide (CO2)--and selling those to industrial gas companies.
Another segment of the ethanol business--cellulosic ethanol--s in even worse shape, Brunson continued. Industrial Info's North American Industrial Project Database shows 33 cellulosic ethanol projects worth $3.3 billion have been cancelled. In addition, about a dozen projects are "on hold." Less than 20 cellulosic ethanol construction projects are in an "active" stage of development, and only a small handful are even under construction. Right now, no commercial scale plants are operating. Brunson said many projects listed as either "active" or "on hold" are hoping for a renewal of federal incentives of $1 per gallon. He advises people not to hold their breath waiting for that to happen.
The market for cellulosic ethanol--made from switch grass, wood chips, corn cobs, corn stalks and other agricultural waste--received a huge boost in 2007 when Congress added it to the federal RFS. Mandated annual production levels would rise from 100 million gallons in 2010 to 250 million gallons in 2011, and 500 million gallons in 2012. Farther out, annual mandated totals reached billions of gallons per year. But actual production has been dramatically below mandated levels--less than 1% of each year's mandate.
"It's nearly twice as expensive to build a cellulosic ethanol plant as it is to construct a corn ethanol plant," Brunson said. "Unlike corn ethanol, we don't really have the process perfected for cellulosic ethanol. I expect Congress will have to revise the RFS to lower production levels of cellulosic ethanol before too long."
"The ethanol industry is trying to stand on its own economic feet, without subsidies," Brunson said. "But it's not easy. The days of, 'If you build it, they will come,' are gone. I can't recommend than anyone invest in ethanol today--the profits have already been captured."
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.
Brunson, Industrial Info's vice president of research for Alternative Fuels, said that the outlook for corn ethanol is grim, and the prospects for cellulosic ethanol is worse.
"Corn ethanol has been stagnant for a few years," he said in an interview. "There was a brief period of active construction of corn ethanol plants when a federal tax credit of 52 cents per gallon was available. But those tax credits ran out at the end of 2011. Today, the U.S. has about a dozen operating plants that are either idled or have choked down their production. The demand is there--production levels are federally mandated--but ethanol can't be produced economically right now."
A federal Renewable Fuel Standard (RFS) requiring that each gallon of gasoline contain 10% ethanol pushed ethanol production capacity to about 14 billion gallons per year. Losing the tax credit lowered the profitability of ethanol production. But producers really got hammered by last year's flooding and drought, which damaged about 20% of the nation's corn crop. That double whammy led to a doubling of corn prices--to about $8 per bushel.
"With corn at $8 per bushel, no federal tax credits, and ethanol plants costing $2.25 to $2.50 per gallon to construct, the economics don't work," Brunson commented.
He said poor economics are why no new ethanol refineries are being built today, and dozens of planned projects have been cancelled or placed on hold. "We have about 200 ethanol facilities. If all of their idled capacity came online, it would increase annual ethanol production by about 1 billion gallons per year--to 15 billion gallons. That's about all we'll need for the next three to five years, unless ethanol refiners are able to increase the mandate for ethanol content in gasoline." He sees that as unlikely, because petroleum refiners are against increasing the ethanol content of gasoline to 15%. And an increasingly budget-conscious Congress means the return of tax credits is unlikely.
To continue operating in a difficult market environment, ethanol producers are "trying to squeeze more value out of each kernel," Brunson said. Some are producing more dried distillers grains (DDG), a high-protein by-product of the ethanol production process that is an additive to livestock food. Others are investigating the viability of making a multimillion-dollar addition to ethanol refineries to produce corn oil from DDG, which could be sold to biodiesel producers as an alternative to soybean oil. Still others are looking into capturing the gases given off during the ethanol production process--chiefly carbon dioxide (CO2)--and selling those to industrial gas companies.
Another segment of the ethanol business--cellulosic ethanol--s in even worse shape, Brunson continued. Industrial Info's North American Industrial Project Database shows 33 cellulosic ethanol projects worth $3.3 billion have been cancelled. In addition, about a dozen projects are "on hold." Less than 20 cellulosic ethanol construction projects are in an "active" stage of development, and only a small handful are even under construction. Right now, no commercial scale plants are operating. Brunson said many projects listed as either "active" or "on hold" are hoping for a renewal of federal incentives of $1 per gallon. He advises people not to hold their breath waiting for that to happen.
The market for cellulosic ethanol--made from switch grass, wood chips, corn cobs, corn stalks and other agricultural waste--received a huge boost in 2007 when Congress added it to the federal RFS. Mandated annual production levels would rise from 100 million gallons in 2010 to 250 million gallons in 2011, and 500 million gallons in 2012. Farther out, annual mandated totals reached billions of gallons per year. But actual production has been dramatically below mandated levels--less than 1% of each year's mandate.
"It's nearly twice as expensive to build a cellulosic ethanol plant as it is to construct a corn ethanol plant," Brunson said. "Unlike corn ethanol, we don't really have the process perfected for cellulosic ethanol. I expect Congress will have to revise the RFS to lower production levels of cellulosic ethanol before too long."
"The ethanol industry is trying to stand on its own economic feet, without subsidies," Brunson said. "But it's not easy. The days of, 'If you build it, they will come,' are gone. I can't recommend than anyone invest in ethanol today--the profits have already been captured."
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.
