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Discussion: Ethanol Policies and Politics

posted on November 13, 2008 at 5:29 PM

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Iowa's agricultural economy has been cushioned in recent years by the upstart of dozens of biofuel factories around the state.

This Iowa Journal looks at the politics of ethanol. Guests are Roya Stanley, Director of the Iowa Office of Energy Independence and Monte Shaw, Iowa Renewable Fuels Association.

Paul Yeager: So, here is a look at some of the questions we'll talk about in tonight's discussion. 

·         Are we on the threshold of consolidation among Iowa's ethanol makers? 

·         What are the near and long-term prospects for the industry? 

·         And what can Iowa do to enhance its chances for sustainability? 

Here to help us answer those questions are Monte Shaw, he is Executive Director of the Iowa Renewable Fuels Association and Roya Stanley, she is Director of the Iowa Office of Energy Independence.  To the two of you, welcome to The Iowa Journal.  So, Monte, welcome back, we had this exact same subject last year at this time.  So, what has changed in a year?  What is the status of ethanol right now?

Monte Shaw: What's changed in the year is amazing with whiplash in the commodity markets that we have had to endure, you know, we had a real speculative bubble this summer after the floods and that put a tremendous amount of pressure on ethanol and biodiesel producers, on farmers, basically on all segments of our industry.  And trying to work through that it's a very tough time in the industry right now, it's a very tough time.

Paul Yeager: There are a number of factors you could say any one of which is the biggest concern right now whether it's volatile grain, narrow production margins, the glut of the U.S. supply.  Pick one of those.  Which one is the biggest?

Monte Shaw: Well, the thing that you can fix real easy is demand.  We need the federal government to expand the amount of ethanol we can use in regular cars.  We know the auto industry has data from when they approved E-10 that showed that it could be higher than E-10.  We'd like to see it at E-15 or E-20 but even if there is some interim step that we can do immediately, President Bush could do that before he leaves office or maybe on the first day President-elect Obama would like to do that, that would be nice. 

And here in the state we're going to be talking to our elected officials about things we can do to increase use here in Iowa.  Some of the numbers don't always seem that important but if you can increase the ethanol you can sell within say trucking the ethanol from your plant as opposed to putting it on a train and sending it across the country even by 20% or 30% that has a huge impact on your bottom line.

Paul Yeager: So, that's a big increase.  So, Roya, what do you think of what Monte has to say?  How can the state get involved -- if they are going to be lobbying the lawmakers here in the state how does the state get involved?

Roya Stanley: Well, I think the state gets involved in a number of ways and certainly along the lines of some of the kinds of things that Monte has talked about.  One thing is that our Governor serves on the Governor's Ethanol Coalition which has actually recently been changed to the Governor's Biofuels Coalition.  And the purpose of that is to have the governors who have a shared interest in supporting biofuels understand the issues and then be able to support nationally the concerns that may actually impede the biofuels industry, one of them being what Monte has mentioned with regard to being able to use higher blends in our current vehicles. 

Something else that the state can do and we are embarking on is to work with the industry to offer more high blend ethanol refueling.  Frequently it is known as E-85 but it can be in blender pumps and therefore you can choose a blend somewhere in between E-10 and E-85.  We think that is very important and we particularly think it's important to see more infrastructure built in the highly populated areas where more people already have those vehicles.

Paul Yeager: And so you mean infrastructure we're not talking another plant, we're talking about a way to get from the plant to the pump or to the consumer?

Roya Stanley: The gas station ... we're talking about a place where if you have an E-85 vehicle can actually conveniently go to refuel your vehicle.

Paul Yeager: Because there's certain pockets in the state where you can't get it without driving for a long time and that has been a big impediment.  So, I want to talk about ways -- is that 10% to 15% increase going to make a big enough difference?  How big of an impact would that be on the state?

Roya Stanley: Well, it would certainly be an impact if we could move -- right now it's something like 70% of all fuel is E-10, is that correct?

Monte Shaw: Somewhere between 70% and 75%.

Roya Stanley: And if just those same consumers moved from E-10 to even E-12 but if E-15 or E-20 then you start to see a substantial ramp up in the demand.

Paul Yeager: So, then how do you force a gas station, there's a couple Casey's and Kum & Go that are statewide, how do you go to them and say, we need you to put this at the pump and besides Hudson you need to go into Waterloo and Decorah and Charles City?  How do you get those towns involved?

Roya Stanley: Well, we have programs that really are incentive based programs that help to buy down the cost and, in fact, some of our retailers have been very active, Kum & Go certainly in particular, in adding E-85 or blended pumps to their mix.

Paul Yeager: Monte, do you think we'll see pumps across the state?  How do we get more pumps across the state from your viewpoint?

Monte Shaw: You know, on one hand we're excited.  When I came to work for the Iowa Renewable Fuels Association three years ago we had like thirteen E-85 pumps.  Because of the state programs to provide some grant money to retailers who want to move forward with this we've seen that number grow.  By the end of this year we're going to have at least 100, probably a few more than 100 in the state. 

So, on one hand you say, wow, that's pretty good progress, almost ten times more.  On the other hand, we have 2000 gas stations out there that aren't offering either mid-level blends or the E-85.  So, we have a lot of two tank systems. 

I think we need to look at ways to not just help out the people who have the flexible fuel cars but what can we do to move the last 25% to 30% of gas that has no ethanol in it to having ethanol in it?  It's been cheaper, it's been dramatically cheaper than gasoline for the last two years.  We've had these large infrastructure grants out there and yet we still haven't seen a large movement on the retailer side to that. 

So, what else can we do with retailers?  What are the other roadblocks?  What other measures do we need to provide to get that done?  And we're going to be looking at that very aggressively because we have a demand problem right now in the industry.

Paul Yeager: So, what are the roadblocks?  We had Senator McCain who was saying I want to do away with the subsidies on ethanol and many of the other fuels.  If he would have been elected would that have been a much bigger problem to get at what you're talking about?

Monte Shaw: Well, actually it would have been more of a challenge in terms of keeping the federal renewable fuels standard and some of the things that the oil companies get, the incentives they get for blending ethanol but Congress would have had a little bit to say about that. 

We had strong bipartisan support in Congress, Iowa's entire congressional delegation supports that, for example.  So, it was obviously a concern but it wasn't a foregone conclusion.  President-elect Obama has obviously been supportive of the renewable fuels standard and ethanol comes from Illinois where they produce a little bit of corn, a little bit of ethanol, not as much as here in Iowa but they're probably second so we feel good about that. 

But we still need to get things like these higher level blends for regular cars through and the auto makers I know are asking for quite a bit from the federal government now.  I'm not an expert on whether or not stuff like that should happen but we certainly need to see them be very receptive to these mid-level blends.  And then here in Iowa we've got to find a way to capture the rest of that E-10 market. 

It might not seem like much gallons but if you go to a local ethanol plant and say I can increase your ethanol sales in a trucking radius by 30% in today's economy that might be the make or break between them turning a profit this year and not.

Paul Yeager: So, we talk a little bit about the next wave but is there a next wave beyond corn that is out there?  ADM is putting a lot of money in Brazil, almost more than half of a start-up plant there for cellulosic.  So, is that the next big thing that Iowa needs to get involved with?

Roya Stanley: Well, most certainly cellulosic ethanol is the next opportunity.  And, in fact, you asked what the state can do -- the Iowa Power Fund is available to support R&D and early stage commercialization and one of the projects that we'll be investing in is the POET project and it is an existing ethanol plant.  And here is one of the keys that I think we need to keep in mind.  We need to keep the ethanol industry healthy, we need to keep our existing plants healthy. 

The first cellulosic approaches will be bolt on.  What that means is that you'll take that new cellulosic technology approach and bolt it on.  The POET project in Emmetsburg is exactly that.  So, using an enzyme to convert the cellulose and in the case of POET they are going to be using corn cobs as that material and that will be part of an existing ethanol plant so that they will work together effectively.

Paul Yeager: Or if you've got a plant that may have gone belly up or has filed for bankruptcy they need to look at a new business approach.  If it's VeraSun they're not completely out of business, they are reorganizing.  Is that something they are going to have to reorganize to embrace that type of technology?

Roya Stanley: Well, I think so but I think it's important that we recognize that we are several years away from having fully commercialized cellulosic ethanol as a process.  So, what has to happen in the meantime is also just as important and that is that those plants need to become increasingly efficient and there are a number of approaches, fractionation is one of them and Monte probably has a lot more knowledge about the various ways of doing that.

Paul Yeager: I want to move on just real quickly because four years sounds like a long time in this industry right now especially since so much has happened in the last year.  So, who survives in this time -- some of these companies might not have had the best business practices -- how do they survive to that point?

Monte Shaw: Well, obviously in the headlines recently has been VeraSun and they are filing a bankruptcy.  We are very happy to see their plants continue to operate, that is good for Iowa's economy.  I'm not an expert in that area, my members don't pay me to tell them how to run their plants, it's a good thing or they'd all be in bankruptcy.  But I can't predict what will happen and plants aren't going to call and tell me exactly where their financial position is. 

What I can tell you is times have been very lean, negative margins for some time, we're still working through the $6 and $7 corn that we've purchased ahead back during the speculative bubble but ethanol prices are down as if you're buying the corn on the market today so that puts a tremendous amount of strain on the plants and we have seen some other bankruptcies around the country. 

The good news for Iowa is we're probably as well situated as anybody for our plants to ride this out.  We have a lot of corn, we're in a low cost area, a lot of our plants were around long enough that they paid down some of their debt and have done some of these things. 

So, I can't sit here tonight and tell you that there won't be another plant that has a financial issue but I can tell you that we're probably in pretty good shape.  Will there be some that find this an opportune time to do some strategic mergers or something?  Yeah.  But we've been talking about that for the last three years and we've only seen one.

Paul Yeager: So, do we see more mergers with less owners?  Or do we see new companies coming in -- all of a sudden Exxon and Shell and the big oil companies getting involved?

Monte Shaw: Yeah, they certainly could.  They could take about two minutes worth of profits and probably buy up half of our industry but they've never really shown an interest in that.  They're very vertically integrated and with all due respect Exxon Mobile they don't know which end of the cow to put the distiller's grains in and I'm not sure they want to get involved in those types of markets. 

So, I'm not saying there won't be mergers but I'm one of those people that thinks there probably won't be as much -- you hear a lot of business people talk about mergers, well that's their business.  They've been talking about it for three years, we've seen one and that was U.S. BioEnergy and VeraSun and I'm not saying that's what led to the problem, it's not, but I think you have a lot of 100 million, 50 million gallon a year plants out there that have been run pretty good, they are in low cost areas and they are just as competitive in that location as any of these big guys are. 

If you do well in managing your margins, what you pay for the corn, what you sell your ethanol for I don't see the pressure to merge but some of them might find it a good time to do so.

Paul Yeager: So, Roya, in the final minute here, hard to believe the credit tightening right now of banks trying to, Wall Street trying to lend to these companies they have lended to in the past to bridge some of this future where do you find the capital to get this done?  How does the state advise those companies trying to move forward?

Roya Stanley: Well, I think there are certainly a number of pieces to that and, again, this goes back to this is basic business.  And as Monte indicated many of our Iowa companies are a little better positioned than some in other areas because they were very profitable and many kept some cash and have that available to them.  I think perhaps another advantage that we have in Iowa is that we still have more of a local banking infrastructure and people really do work in their communities.

Paul Yeager: I like the way that goes.  Unfortunately, we're out of time.  Roya Stanley, thank you so much.  Monte Shaw, thank you both for coming in tonight to help us out here on the Journal.  

Tags: agriculture alternative energy biofuels biotechnology Centerville economy Energy/Environment ethanol Iowa politics renewable fuels


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