Arriving at the Ethanol Blend Wall
AgMRC Renewable Energy & Climate Change Newsletter
Dr. Robert Wisner
Iowa State University
A recent report by the Environmental Protection Agency (EPA) indicates the U.S. national average blend of ethanol with gasoline for the last several months has slightly exceeded 10% . For the ethanol industry,10% is a special number believed to represent the “Blend Wall” at which the domestic ethanol market becomes saturated or almost saturated. The saturation point stems from the 10% ethanol-gasoline blend that is allowable for all gasoline-powered vehicles regardless of age. A small additional ethanol market is available through sales of E-85, a blend of 70% to 85% ethanol and 15% gasoline. However, this market is limited by (1) the very small percentage of retail gas stations that sell E-85, (2) the limited number of flex-fuel vehicles (the only type EPA has approved for its use), and (3) lack of price competitiveness of E-85. In many E-85 stations, E-85 has not been priced low enough relative to gasoline to offset the sharp decline in fuel mileage that occurs with E-85.
|With the U.S. average ethanol-gasoline blend now at or very slightly above10% ethanol, can ethanol use meet the mandated increases for 2012 and in the next four years?|
EPA also has recently approved the use of E-15 in 2001 or newer gasoline-powered vehicles. E-15 is a blend of 15% ethanol and 85% gasoline. However,gasoline retailers have been reluctant to begin selling E-15 for a number of reasons including (1) concerns about liability issues since it is not acceptable for all vehicle model years, (2) needed investments in additional tanks and pumps, and (3) in some cases limited space for more tanks. Some consumers also are concerned about auto warranty issues if they use this fuel in non-flex-fuel vehicles. Retail blender pumps that can provide various ethanol blend levels may avoid some of the extra expenses otherwise required for marketing E-15 and may facilitate gradual opening up of this market. However, the main market for fuel ethanol is E-10.
With the U.S. average ethanol-gasoline blend now at or very slightly above 10% ethanol,questions are being raised about whether ethanol use will be able to meet the mandated increases for 2012 and in the next four years. These increases are spelled out in the 2007 Energy Independence and Security Act (EISA) . In this article, we address the question of whether the10% average blend will prevent the ethanol industry from processing 5.0billion bushels of corn into ethanol and distillers grain (DGS) in the current 2011-12 corn marketing year, as projected in the latest USDA supply-demand report. (4)
Weekly Ethanol Production
Figure1 shows weekly U.S. ethanol production in millions of gallons, as reported by the Energy Information Agency (EIA) of the Department of Energy. These data are available only for 2010 and 2011. The data show a different total than implied by using the most recent Economic Research Service (ERS), USDA data on corn processed into ethanol and a2.78 gallons per bushel ethanol yield commonly used by grain analysts and USDA. This implies that (1) either the weekly data understate actual production by 2.5% or (2) the ethanol yield per bushel of corn has been lower than widely believed, at 2.71 gallons per bushel. We have no explanation for the difference in ethanol yields although denaturing might be a factor. In this article, for bushels of corn used for ethanol and distillers grain (DGS) production, we will continue to rely on USDA data. For the weekly and annual ethanol production and production change from last season, we will continue to use EIA data and convert USDA corn bushels to ethanol with a 2.71 conversion factor. In Figure 1, we calculate needed ethanol production for the rest of the year using 2.71 gallons per bushel to convert USDA’s annual5.0 billion bushels of corn use for ethanol to annual ethanol production. Figure 1 indicates average weekly ethanol production so far this season has been about 2.1% above the same weeks last year. For the remainder of the current September 1, 2011-August 31, 2012 corn marketing year, average weekly ethanol production will need to be about0.94% below a year earlier to reach USDA projections, as indicated by the dashed red line. The ethanol industry, faced with exceptionally good economic returns this fall and a strong likelihood of losing both the blenders’ tax credit and the ethanol import tax by year-end, has moved production above a year earlier and may continue to do that for the rest of this calendar year. Production levels from the beginning of 2012 onward are more uncertain because of the likely change in government ethanol incentives.
Ethanol exports are one way the biofuels industry may continue its growth even with a domestic blend wall and loss of domestic blenders’ tax credits –at least for the short term. Starting in February 2010, the U.S.became a net exporter of ethanol. (5) Since then, U.S. ethanol exports have been relatively strong. However, for the longer term -- barring unfavorable weather in major foreign sugar-producing areas-- expansion of U.S. ethanol exports may be more difficult. Brazil has been the major competitor in the global ethanol market, but growing world demand and less than ideal weather in India and Brazil have tightened sugar supplies and sharply increased world sugar prices in the last two years. These two countries are the world’s largest sugar cane producers. (6) Tight sugar supplies in turn have encouraged Brazilian sugar processors to use more of their production for sugar and relatively less for ethanol. As a result, high sugar prices have tightened Brazil’s ethanol supply and reduced its exports. In addition, Brazil’s domestic demand for ethanol is continuing its upward trend as consumer incomes increase. This year, the U.S. has exported small quantities of ethanol to Brazil. (7)
Figure 2 shows Brazilian ethanol exports since 2003. After increasing rapidly from2003 through 2008, its exports reached a peak of 1.34 billion gallons. Since then, Brazilian exports have fallen by 63% or nearly 840 million gallons. That’s equivalent to the ethanol from about 310 million bushels of corn. (8) Reduced Brazilian ethanol exports have paved the way for increased U.S. ethanol exports. From 2008 to 2011, assuming October-December 2011 exports continue at the average of the first nine months of this year, U.S. ethanol exports will have increased by acorn-equivalent of approximately 290 million bushels. At that rate, the2011 calendar year annual U.S. ethanol exports would be approximately955 million gallons or 350 million corn-equivalent bushels.
For the year ahead, recent sugar and ethanol data from Brazil suggest sugar supplies will continue to be tight and likely will prevent a major increase in its ethanol production.
U.S. ethanol exports also are being helped by foreign government mandates that require increased ethanol blend levels in gasoline, especially in the EU and Canada. Figure 3 shows U.S. monthly fuel ethanol exports so far this calendar year and comparisons with last season. Export data from the U.S. Energy Information web site are only available for 2010 and 2011. Monthly ethanol exports so far this year have been well above 2010levels but have fluctuated in a wider range. These data are identified as fuel ethanol exports and do not include ethanol exported as beverages or for use for other industrial purposes.
Marketing year ethanol exports continuing at an annual rate of 920 to970 million gallon range for 2012 would allow the U.S. ethanol industry’s production to modestly exceed EISA mandates, thus moving ethanol production and corn use for ethanol above the domestic blend wall.
Figure 4 provides a longer term perspective on U.S.September-August marketing year ethanol exports. Before 2009-10, exports were much lower than now and sometimes showed large year to years wings. Tight world sugar supplies and reduced Brazilian exports are the major factor in the sharply higher U.S. ethanol exports in the last two years. Underlying tight global sugar supplies are a caution that for the longer term, some weakness in U.S. ethanol exports is a strong possibility.
EISA Corn-starch Ethanol MandatesThe ethanol mandates increase each year through calendar year 2015. In that year, they reach a peak of 15 billion gallons and remain constant through 2022. For the 2011-12 marketing year, the mandate increases by 0.60 billion gallons. On a marketing year basis for 2011-12, that would be equivalent to an increase to ethanol produced from approximately 4,798 million bushels of corn. Last season’s corn-equivalent mandate was approximately 4,576 million bushels of corn, although USDA data indicate the industry processed 5,021 millionbushels into ethanol and distillers grain. In other words, the industry processed approximately 445 million bushels or 10% more corninto ethanol than mandated by EISA. Ethanol exports account for about 300 million bushels of the excess beyond the mandated level.
It should be pointed out that our calculations of the marketing year mandates are approximations. For example, we combine four months of the 2010 calendar year mandate with eight months of the 2011 marketing year mandate to arrive at the 2010-11 marketing year total mandate. As an example of potential limitations from this approach, corn processing for ethanol in the first part of the calendar year may have been below the monthly equivalent of the mandate, thus leading to a need to produce above the monthly average mandate for the remaining for months of the calendar year. In that case, the following marketing year’s effective mandate might be above (or sometimes below) our estimated marketing year mandate.
Renewable Information Numbers (RINs) are the mechanism for enforcing ethanol blending mandates. Each gallon of ethanol is issued a RIN that is submitted to the EPA when the ethanol is blended to fill mandated requirements. For ethanol blending which exceeds the mandates, RIN credits can be carried over to the next year and used in place of actual blending for that year. (9) RINs also are required for unblended ethanol that is exported, but unblended exports do not count toward the mandates. Most U.S. fuel ethanol exports are unblended.
2010-11 and 2011-12 Corn Processing for Ethanol and DGS vs. the Mandate
Adding the marketing year corn equivalent mandate for 2010-11 of 4,576 million bushels and 300 million bushels corn equivalent of ethanol exports gives a total of 4,876 million bushels corn equivalent of ethanol which would have required RINs being submitted to EPA, theoretically leaving about 145 million corn equivalent bushels of excess RINs may have been generated in the 2010-11 marketing year. A portion of these excess RINs might be used in place of actual blending in 2012. If so, they would tend to slightly reduce ethanol demand and could contribute to slightly less corn being processing than implied by the mandates.
With 2012 ethanol exports continuing at the 2011 monthly average, the increased mandate and exports together would require the alcohol from about 5.1 billion bushels of corn. That’s 100 million bushels above USDA’s current projection for the 2011-12 marketing year. Whether actual corn use for ethanol reaches that level will depend on availability of excess RINs that can be substituted for actual ethanol blending with gasoline, as well as ethanol exports.
Data on RINs issued, already used, and assigned or available for use can be accessed on an EPA web site. http://www.epa.gov/otaq/fuels/rfsdata/2011emts.htm These data suggest that on October 24, 2011 about 145 million bushels corn equivalent of ethanol (D6) D6 is the other renewable fuel category,which is primarily corn starch ethanol along with small amounts of ethanol from other feedstocks, including grain sorghum, potato and dairy wastes from facilities that do not qualify as advanced biofuels. RINs had not yet been used. It is uncertain what this total may be at the end of December. Recent weekly ethanol production rates suggest the total may increase some. Whether that is the case will depend partly on U.S. ethanol exports for the rest of this year. With no change in exports, some or all of these RINs might be used to reduce corn processing for ethanol later in the current marketing year to or slightly below USDA.’s 5.0 billion bushel projected level.
For2012-13, the mandated level of ethanol blending in gasoline will increase by another 600 million gallons or in corn equivalents, an additional 220 million bushels. If ethanol exports continue at the 2011rate, theoretical corn processing for ethanol would be about 5.32billion bushels. However, with the U.S. average ethanol gasoline blend already slightly exceeding 10%, it is questionable whether this level of ethanol production can actually be reached. Unless the retail gasoline sector moves quickly to market E-15 or more E-85, the blend wall may become a restraint on corn processing and ethanol production.
Looking beyond 2012-13, the marketing year equivalent corn-starch ethanol mandates increase by an additional 1.4 billion gallons in the following three years, at which they reach a maximum 15 billion gallons that remains constant through 2022. At the current annual gasoline consumption rate, the national average gasoline blend at the 15 billion gallon level would be about 11 to 11.3%. An average blend at that level is possible but will depend on industry moves to market E-15and/or competitive pricing of E-85 to make it economical for consumers. Without an increase in the blend wall, demand for corn at ethanol processing plants might start to level off in 2012 or even decline if ethanol export demand weakens.
Summary and Conclusions
The ethanol industry is facing prospects for three important developments that relate to future size of its market. One is related to government mandated ethanol blending requirements for motor fuel. The other two are (1) exports and (2) the “blend wall”. For the last three years,the corn-starch ethanol industry has anticipated that a “blend wall”would be reached, at which time the domestic fuel ethanol market would become saturated. Until the blend wall was raised or removed, further growth in demand for ethanol would be limited mainly to (1) growth in domestic motor fuel consumption, (2) growth in ethanol exports, and/or(3) growth in the E-85 market through increased availability at retail stations, an expanded flex-fuel vehicle fleet, and competitive pricing of E-85. EPA’s approval of E-15 for 2001 and newer vehicle models was intended to raise the blend wall. However, so far the retail petroleum industry has been slow to accept and market E-15, so that this source of market growth has been minimal. EPA data indicate the domestic blend wall has now been reached.
Unless higher gasoline-ethanol blends become more widely accepted soon, increases in mandated levels of ethanol blending may be on a collision course with the blend wall. This prospect raises important questions for both the corn-starch ethanol industry and the infant cellulosic ethanol industry that is expected to emerge in the next few years. Differential ethanol policies that vary by feedstock and technology are reflected in the number of RINs gallons issued per actual gallon of ethanol as well as in the cost to the petroleum industry for purchasing credits that will allow it to bypass mandated blending levels. These policies may become important in determining which type of ethanol has greatest ability to access a limited domestic market. Costs of purchasing RINs to fulfill mandated obligations without actual ethanol blending also may become increasingly important to the industry. These are possible topics for future articles.
Arrival of the blend wall also has important implications for corn demand. Our analysis suggests that with continued relatively strong ethanol export demand, corn processing for ethanol and DGS may be close to USDA projections for the 2011-12marketing year. However, because of availability of some excess RINs,actual corn use for ethanol has some potential to be slightly below USDA projections. For the 2012-13 and later marketing years, growth in corn demand for ethanol appears likely to be restrained unless E-15and/or E-85 become widely accepted soon
1 Tony Radich and Sean Hill, Issues and Methods for Estimating the Share of Ethanol in the Motor Gasoline Supply, U.S. Energy Information Administration, October 6, 2011.
2For more detail on these issues, see R. Wisner, “Is E-85 ethanol competitive with E-0 outside the Midwest?”, AgMRC Renewable Energy and Climate Change Newsletter, September 2010
3 Energy Independence and Security Act, December 2007, U.S. Congress
4 World Agricultural Outlook Board, USDA, World Agriculture Supply-Demand Report, November 9, 2011
5 Energy Information Agency, “Growth slows in U.S. ethanol production and consumption”, September 14, 2011
6 ERS, USDA, World Sugar Supply and Demand, May 2011
7 U.S. Energy Information Administration, Petroleum and other Liquids, Exports by Destination
8 Data are from Constanza Valdes, Brazil’s Ethanol Industry: Looking Forward, BIO-02, FAS, USDA, June 2011.
9 EPA, Fuel and Fuel Additives, 2011 EMTA Data
10 Office of Transportation and Air Quality, US Environmental Protection Agency, National Renewable Fuel Standard Program - Overview April 14 - 15, 2010