Ethanol industry faces tough decisions due to worsening drought

By Holly Jessen | July 18, 2012

As drought conditions continue to creep across two-thirds of the lower 48 states, the ethanol industry is preparing for the possibility of tight corn supplies for the second year in a row. “We’re kind of bracing for the worst, in a way,” said Walt Wendland, CEO of Golden Grain Energy LLC and Homeland Energy Solutions LLC, which are both located in Iowa.

Still, Wendland cautioned against jumping to conclusions. “We have no idea where this crop is going to be—although we know this wasn’t the crop we were hoping for,” he said. “Come fall when we get this crop out of the field there’s probably going to be some tough decisions to be made.”

Wendland ethanol plant board meetings were previously focused on getting to new crop corn supplies but that focus shifted at the meetings held this week. “Now getting to new crop isn’t the problem. The problem is how do we manage with new crop?” he said. Later he added, “I just don’t see any scenario that this year is going to be financially healthy for our industry.”

On July 18, the USDA announced it was adding an additional 39 counties in eight states as primary natural disaster areas due to drought and excessive heat. In all, producers in 1,297 counties in 29 states are now eligible for disaster assistance, including the entire state of Missouri. A total of 61 percent of the continental U.S. is in a moderate to exceptional drought, according to the U.S. Drought Monitor.

The crop progress report released by the National Agricultural Statistics Service on July 16 revealed that a higher percentage of the corn crop is in the fair, poor or very poor category, compared to the previous week and last year. Those are the categories Wendland is keeping an eye on, since those crops aren’t likely to produce much corn, even if much-needed rain were to fall.

The combined average of 18 states (which make up 92 percent of the 2011 corn acreage) shows that 69 percent of the corn crop is now in the fair, poor or very poor category—up 9 percent from the previous week. Last year the 18-state average put only 34 percent of the corn crop in the fair, poor or very poor category. Out of that same pool of states, Indiana, Kentucky and Missouri have the most very poor corn at 37 or 38 percent each. Illinois, Michigan and Tennessee came in with 25 percent or more very poor corn.

The area around Mason City, Iowa, where 105 MMgy Golden Grain is located, hasn’t had much rain for a month, although nearly 3 inches fell in mid-June, Wendland said. Thanks to good soils with moisture holding power the crop in that vicinity is looking OK. Homeland Energy, a 120 MMgy plant located in Lawler, Iowa, on the other hand, is in an area with more variable soils. Wendland’s son, a corn producer that grows corn near the ethanol plant, did a field survey that revealed about half the fields have an expected yield of 140 bushels per acre while the other half are only yielding about 20 bushels per acre. Overall, however, Iowa has a better crop rating than some states.

Front Range Energy LLC, a 40 MMgy plant in Windsor, Colo., is in an area where corn is irrigated and the crop looks pretty good. It’s tasseling, as usual, later than crops in other states. “It’s been hot out here but most everybody is irrigating with ditch water or water rights so the crop looks pretty good,” said Dan Sanders, Jr., company manager, adding that fires in Colorado have added difficulty to the current water situation in that state. Front Range Energy buys about half its corn locally and rails or trucks in the remainder.

There are a lot of rumors going around that the renewable fuel standard (RFS) could be waived or even repealed, Wendland said. The concern is that lowered corn yield would negatively impact the ethanol industry’s ability to meet the yearly RFS target for renewable fuel. In fact, a briefing has been scheduled for July 19 at the U.S. House of Representatives and Senate that is made up of what the Renewable Fuels Association calls “a familiar coalition of anti-ethanol livestock groups.” One of the speakers is Tom Elam, a Turkey Federation consultant that was part of a 2008 effort to request a waiver for the RFS, which ultimately failed. 

On July 16, Geoff Cooper, vice president of research and analysis for the RFA, published a white paper that examined the potential impacts of the drought on the RFS and the outlook for the ethanol industry. He concluded that ethanol exports will likely decrease in 2012 and that, should physical ethanol gallons not be available, obligated parties may use banked renewable identification numbers (RINs) for compliance. “The surplus of renewable fuel RINs has been estimated to be as large as 2.5 billion,” he said. “This means use of physical gallons for compliance with the 2012 RFS could be short of the RVO [renewable volume obligations], but the shortfall can be entirely offset by using excess RINs.”

In addition, a waiver of the RFS can only be approved if the RFS would “severely harm the economy or environment of a state, a region, or the United States,” according to the Clean Air Act. “EPA does not have the authority to arbitrarily waive the overall RFS based on speculation about the impacts of a short corn crop; rather, the statute dictates the process that the agency must follow to consider a waiver,” Cooper said.

The 2008 petition by the Governor of Texas to waive the RFS by 50 percent was denied by the U.S. EPA, which clarified that historic drought, not the RFS, was what was contributing to higher grain prices. In addition, an EPA analysis showed any marginal increases to food prices would be offset by reduced gas prices, Cooper said.

During a press call held July 11 Agriculture Secretary Tom Vilsack addressed a question about whether the USDA would support waiving the RFS in light of the drought. That was the day that the monthly World Agriculture Supply and Demand Estimates report was released, estimating this year’s corn crop at 12.97 billion bushels, a 12 percent decrease from the earlier estimate of 14.79 billion bushels. “We're not at that point, and certainly, the renewable fuel program is an extraordinarily important aspect of our efforts to rebuild and revitalize the rural economy,” he said. “The reality is we are still looking at the third largest corn crop on record, and we are still looking at a very large bean crop, notwithstanding the disaster. Obviously, it could have been significantly higher because of the additional planted acres. So, at this point, we have no plan to adjust the Renewable Fuel Standard.”