By Connie Hardy, content specialist, AgMRC, Iowa State University, email@example.com.
Revised April 2012 by Gary Brester, professor, Department of Agricultural Economics, Montana State University, firstname.lastname@example.org and August 2012 by Connie Hardy.
Production and Demand
U.S. ethanol production increased from 3.4 billion gallons in 2004 to 14.8 billion gallons in 2012. According to Ethanol Producer magazine, there are currently 218 ethanol plants in the United States producing 14.8 billion gallons of fuel ethanol per year (bgy). Canada has 16 plants producing 1.8 bgy. In the United States, 8 new plants are under construction that represent 191 million gallons per year (mgy) of production, and Canada has 2 plants under construction representing 76 mgy. The U.S. Renewable Fuel Standard (RFS) requires that 15 billion gallons of "conventional" biofuels (including corn/wheat/sugar-based ethanol and biodiesel made from vegetable oils and animal fat) be produced by 2015; at this time, fuel ethanol production nearly meets the RFS.
Although corn is by far the primary feedstock for conventional ethanol production, wheat, milo and barley are other grain-based feedstocks used for ethanol production. Four U.S. plants use beverage/brewery waste, cheese whey or potato waste. Two plants use primarily wood waste (less than 20 mgy of ethanol production), and six plants use cellulosic material (grasses, stover, municipal waste.) Most of the plants under construction are cellulosic plants.
Demand for ethanol is likely to increase due to the EPA approval of E-15, a 15 percent blend of ethanol with gasoline. Prior to the 2012 approval, ethanol was blended in a 10 percent ratio with gasoline and sold for automobile fuel across the United States. Ethanol blended fuel has also been approved for use small engines and boat motors.
Fuel ethanol production in the United States was hastened by the need for an oxygenate to replace Methyl Tertiary Butyl Ether (MTBE) in gasoline blends. MTBE is a petroleum-based oxygenate that was originally blended with gasoline as a substitute for lead to prevent pre-ignition pinging. Subsequently, the 1990 Clean Air Act required the use of oxygenates in winter gasoline blends and, later, in year-around blends to reduce pollution in selected cities. However, the use of MTBE as an oxygenate was later banned by 27 states because of suspected links between groundwater contamination caused by fuel spills and cancer. MTBE was first banned in California, New York and Connecticut. Given that the RFS requires that 12 billion gallons of ethanol be blended with gasoline annually, only small amounts of MTBE are used in those states where it has not yet been banned. California is the largest consumer of ethanol followed by Illinois, Iowa, Minnesota, Ohio, Indiana, Michigan, Missouri, Wisconsin and North Dakota.
As ethanol production grows to meet the requirements of the December 2007 RFS, production improvements are being adopted to use corn more efficiently and improve the economics of ethanol production. The general term "fractionation" refers to the process of separating a corn kernel's endosperm (starch-rich portion), germ (protein-rich and oil-rich portion) and bran (fiber-rich portion), but the term fractionation might also refer to the separation of oil from the leftover fermentation broth, commonly called "backend fractionation." With this modified fractionation process, corn oil can be separated and sold to other markets.
Fractionation at the front end of the process has been a part of corn dry milling and corn wet milling for many years. Currently, most dry-mill ethanol plants move the entire corn kernel through the process, allowing the fermentation step to use the starch portion of the corn, and the remaining protein, oil and fiber are part of the co-product called "distillers grains." Fractionation helps plant managers control corn kernel separation, improve production efficiencies and develop co-products. This allows ethanol producers an opportunity to manage risk through the development of a portfolio of products.
Ethanol’s Recent History
Although ethanol has been produced for hundreds of years and used in automobiles dating back to Henry Ford’s Model A, the industry was very small until the past decade. The Energy Policy Act of 1978 established the first federal subsidy for the ethanol industry by providing a $0.40/gallon gasoline excise tax exemption for ethanol wholesalers. The Surface Transportation Assistance Act of 1982 increased the exemption to $0.50/gallon. The 1990 Omnibus Budget Reconciliation Act increased the exemption to $0.54/gallon and extended it to the year 2000. It appears that the Act also allowed blenders the option of a $0.54/gallon income tax credit in lieu of the excise tax exemption. In 1998, the credit was extended for additional years but at a slightly lower level ($0.51/gallon). In 2004, the program was renamed the Volumetric Ethanol Excise Tax Credit. It provided a $0.51/gallon income tax credit to gasoline blenders based on ethanol usage. That is, an E10 blend contains 10 percent ethanol. Hence, the $0.51/gallon tax credit per gallon of ethanol translates into a tax credit of $0.051/gallon of E10 gasoline. The 2008 Farm Bill reduced the credit to $0.45/gallon. The tax credit expired on December 31, 2011. In addition, a $0.54/gallon import tariff on ethanol that had existed since 1980 also expired at the end of 2011.
The banning of MTBE by many states created an almost instant demand for approximately 7 bgy of ethanol. Currently, the most critical factor that is fueling the growth of the industry is the 2005 RFS. The RFS was primarily a product of energy policy that mandated a minimum of 7.5 billion gallons of renewable fuels be incorporated into the U.S. gasoline supply by 2012. A new RFS passed in the 2007 Energy Bill increased these requirements annually (12 billion gallons in 2012) and mandates that 36 billion gallons of renewable fuel be produced by the year 2022. Initially, much of the investment in ethanol facilities focuses on dry mills that were funded by corn producers. Wet-mill facilities are more flexible than dry mills because they can produce products such as high-fructose corn syrup in addition to ethanol. However, dry-mill plants are less expensive to construct and can typically be built in less than two years. In 2008, farmer-owned plants represented 39 percent of production capacities. Favorable returns and increased facility sizes attracted and required significant investments from outside rural communities. In 2011, only 11 percent of total ethanol production capacities were farmer-owned.
More than 82 percent of U.S. ethanol is produced by dry-mill plants and the remainder by wet mills. The size of new dry-mill plants is increasing. In 2003, typical production capacity of new dry mills was 20 to 50 million gallons per year. Today’s dry mills have capacities of 100 million gallons (or larger) per year, and some 50 mgy plants have recently been remodeled to double of their original size.
Internationally, ethanol has experienced substantial growth in countries such as Brazil, Argentina, United Kingdom, Canada, China and Thailand. Each of these countries have implemented some form of ethanol requirements to address either environmental or fuel dependency concerns.
Currently, few alternatives to the use of ethanol as an oxygenate exist but the use of butanol is being explored, a renewable fuel that can be made from the same feedstuffs as ethanol. However, ethanol production capacities are almost twice of that needed to simply meet EPA blended fuel standards. Hence, one-half of ethanol capacities currently exist because of the RFS. Recent record corn prices and concomitant price increases in food grain prices has generated some re-examination of ethanol polices as evidenced by the expiration of blending tax credits and import tariffs. Reductions in the RFS would stress many smaller plants and those not located near ample corn supplies.
Supply Chain Elements
The location of ethanol plants is critical to their profitability. Favorable locations are those near to ample corn supplies to reduce corn transportation costs and local basis effects. In addition, access to natural gas pipelines, electricity transmission lines, rail service and highways are important factors. Ethanol cannot be blended with gasoline and then transported in pipelines because of its tendency to collect water that cannot later be removed. Therefore, 75 percent of ethanol is transported by rail and 25 percent by truck to blenders and retailers. In addition, proximity to users of ethanol byproducts (distillers grains, oil, carbon dioxide) is important for profitability.
Bioenergy Briefing Room, Economic Research Service, USDA.
Iowa Grain Quality Initiative, Iowa State University.
Renewable Fuels Association.
Selected Developments Impacting the Ethanol Industry, AgMRC Renewable Energy Newsletter, July 2012.