The onward march of ethanol

by Suzi Fraser Dominy
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Note: Production reported in gallons. To convert to liters, multiply gallons by 3.8.

In March 2005, the Chicago Board of Trade launched its CBOT ethanol futures contract. This sure indicator that ethanol has arrived in the mainstream comes on the heels of a year marked by spectacular growth in U.S. ethanol production and demand.

The U.S. Energy Information Administration notes that last year’s ethanol production was double that of 2000. The numbers are staggering: for the year, 81 ethanol plants located in 20 states produced a record 3.41 billion gallons, a 21% increase from 2003 and 109% from 2000.

"Consider," said Bob Dinneen, president and chief executive officer of the Washington D.C.–based Renewable Fuels Association (RFA), "it took the industry 10 years to reach our first billion gallons. It took another 10 years to achieve the second billion gallons. It has taken just two years to reach the third billion gallons."

Ethanol plants are springing up like mushrooms: construction of 12 new ethanol plants was completed in 2004. These new facilities, combined with expansions at existing plants, increased annual production capacity by 500 million gallons to more than 3.6 billion gallons.

At the end of 2004, 16 plants and two major expansions were under construction, representing an additional 750 million gallons of production capacity.

By the time World Grain went to press in June 2005, total capacity stood at 3.8 billion gallons per year, with a further 739 million gallons per year under construction, bringing total capacity to 4.5 billion gallons per year.

Drivers for growth
Demand for fuel ethanol in the United States reached a new high in 2004 of 3.57 billion gallons, and the RFA confidently anticipates expansion of the market.

The RFA’s 2004 Ethanol Industry Outlook Report highlights several drivers for growth, including the passage of the American Jobs Creation Act. This law significantly changes the way taxes are collected on gasohol and other ethanol blends, with a new excise tax credit system, the Volumetric Ethanol Excise Tax Credit (VEETC) law.

The system provides greater flexibility and new market opportunities for the use of E-10 (the most common form of ethanol, comprised of 10% ethanol and 90% gasoline), E85 (a mixture of 85% ethanol and 15% gasoline), as well as for biodiesel.

In the absence of U.S. federal action, increasingly states are taking steps to secure renewable fuel usage. In 2004, Hawaii joined Minnesota in requiring the use of ethanol in gasoline sold in the state, while Minnesota sought to expand its ethanol use from 10% to 20%.

Beginning in January 2004, California, New York and Connecticut discontinued the use of methyl tertiary-butyl ether (MTBE), a gasoline additive blamed in groundwater pollution, in reformulated gasoline (RFG). That brought to 14 the number of states with a ban in place and created sufficient shift in demand to see ethanol-blended RFG surpass MTBE-blended RFG as the second most common fuel in the U.S., behind conventional gasoline.

Many other states are also considering MTBE bans as a means of protecting drinking water supplies.

Another pro-ethanol development in 2004 was record-high crude oil prices that made ethanol an attractive octane blend component across the country. Crude oil prices look unlikely to drop in the near future.

A major boost to ethanol usage would be the passage of a Renewable Fuels Standard (RFS).

The U.S. House of Representatives in April 2005 passed the Energy Policy Act of 2005. This comprehensive energy legislation includes a renewable fuels standard (RFS) that calls for 5 billion gallons (19 billion liters) of renewable fuels to be blended into the nation’s transportation fuel supply by 2012.

The legislation must be passed by the Senate and signed by the president before becoming law.

But the outcome is not certain: the legislation contains a number of controversial provisions, including U.S.$8 billion in tax breaks to energy producers and billions of dollars more in direct federal aid, criticized by Democrats and some Republicans as far too expensive.

The bill also would provide liability protection for producers of MTBE and would allow drilling in the Arctic National Wildlife Refuge in Alaska, an issue that has ended previous attempts to enact energy legislation.

Grain usage
U.S. grain producers certainly hope the rosy forecast for ethanol expansion is correct. In 2004, the U.S. ethanol industry processed a record 1.26 billion bushels (approximately 32 million tonnes) of corn into ethanol, 11% of the nation’s record corn crop of 11.7 billion bushels (approximately 297 million tonnes). Ethanol production also consumed more than 11% of the nation’s sorghum.

Dry mill ethanol facilities accounted for 75% of U.S. ethanol production, and wet mills 25% in 2004. The co-products from these plants are extremely important revenue streams. Ethanol dry mills produced approximately 7.3 million tonnes of distillers grains while ethanol wet mills produced approximately 426,400 tonnes of corn gluten meal and 2.36 million tonnes of corn gluten feed and germ meal.

Distillers Dried Grains with Solubles (DDGS) have created an important export opportunity for U.S. producers.

Research into feed applications for DDGS is ramping up. Historically, over 85% of DDGS has been fed to dairy and beef cattle as a high-quality, economical feed ingredient; now use in swine and poultry diets is expanding also.

The U.S. exports approximately 1 million tonnes of DDGS, with the largest importers being Ireland, the United Kingdom, Europe, Mexico and Canada.

This heavy dependence on European export markets will further accelerate the requirement for thorough segregation and identity preservation in the corn industry. This message was brought home clearly in April 2005 when the European Commission in an emergency meeting banned imports of corn gluten feed and brewers grain from the U.S. after the discovery of unapproved genetically modified corn in imports from the U.S. About 1,000 tonnes of Bt10 maize are thought to have entered the E.U.’s food chain during the past four years.

Global expansion
The U.S. is the world’s largest producer of grain-based ethanol and second largest producer of all types of ethanol. Brazil leads production and exports of ethanol but utilizes sugar cane as the feedstock.

Together the U.S. and Brazil produce more ethanol than the combined output of all other countries. Growth is not confined to these giants, however.

World ethanol production rose to nearly 11 billion gallons in 2004, driven for the most part by demand for fuel grade products. Fuel ethanol accounted for 73% of world production, with beverage ethanol at 17% and industrial ethanol at 10%.

Canada and Central and South American countries in particular are expanding their ethanol production capacity. A number of counties already have ethanol programs in place, including:

Brazil — Requires 25% ethanol blends
European Union — 2% (energy content) biofuels target by 2005, increasing to 5.75% by 2010
Saskatchewan, Canada — Requires 5% ethanol blends, increasing to 7.5% in 2005
Manitoba, Canada — Requires 10% ethanol blends by end of 2005
Colombia — Requires 10% ethanol blends in large cities in September 2005
Thailand — Requires all gasoline stations in Bangkok to sell 10% ethanol blends
China — Requires ethanol blends in several provinces
Argentina — Requires move to 5% ethanol blends over next five years

There is no slow-down in sight: the RFA predicts that growth in fuel ethanol production will not just continue but accelerate worldwide as countries seek ways to comply with the greenhouse gas emissions limits contained in the Kyoto Protocol.