KANSAS CITY, MISSOURI, US — Just as the global biofuels industry was regaining ground from a severe drop in production caused by the COVID-19 pandemic, it is now facing new struggles with rising feedstock prices caused in part by Russia’s invasion of Ukraine, and the return of the food-versus-fuel debate. 

After seeing growth of nearly 4% per year from 2010 to 2019, the production of biofuels plummeted in 2020 because of the pandemic and related lockdowns that cut fuel demand for all transport modes. The 11.6% drop in global production to 146 billion liters (ethanol and biodiesel), according to the International Energy Agency (IEA), was the first reduction in annual production in two decades. 

By 2021, as pandemic restrictions were lifted, biofuels production started to recover, reaching an estimated 151.3 billion liters. For 2022, the IEA is estimating total production of 158.6 billion liters. 

But the war in Ukraine adds uncertainty not only because of rising feedstock prices that make biofuels production less cost-effective, but also because it is causing some to again raise the food-versus-fuel argument. If commodity availability is tight due to unrest in the Black Sea region, coupled with drought in Latin America, priority is to food use with energy production taking a backseat, some will argue. Policies mandating the usage of a certain percentage of biofuels are being called into question around the world. 

“Certainly, the feedstock prices going up on everybody is going to inflict some pain because of what’s happening in Ukraine,” said Stephen Nicholson, global grain and oilseed strategist for Rabobank. “But these are issues that were already in place before we got to the conflict, and the conflict has just exacerbated it. Whether it’s commodity prices or food inflation, it’s a slippery slope. We as a society have to have a discussion about where we want to invest, and how we want to invest, and what’s important and not important.”

The biofuels industry argues that now is the right time to increase usage of biofuels to lower prices for consumers. In the United States, the Renewable Fuels Association (RFA) is advocating for allowing broader use of ethanol blends such as E15.

“Today, E15 is selling for 10 to 25 cents per gallon less than standard gasoline, meaning year-round use of the fuel would save the average American household at least $125 to $200 on its annual gasoline bill,” the RFA and 1,000 farmers, ethanol workers and biofuels supporters said in a letter to US President Joe Biden. “Those savings would accrue immediately while also providing energy, environmental and economic benefits for the long term.”

US ethanol production

The United States is the world’s top producer of ethanol, accounting for 55% of global production. Brazil comes in second at 27% of the global share while the EU accounts for about 5%. No other country had more than a 3% share in 2021, though India saw a notable increase in production, according to the RFA. 

The US industry, which primarily uses corn as a feedstock, recovered substantively in 2021 from COVID-19 impacts. As the economy reopened, people started driving again and gasoline and ethanol demand increased over 2020 levels, the RFA said. In response, ethanol producers restored capacity that had been idled during the pandemic and increased operating rates. By the end of the year, there were 208 ethanol biorefineries with a capacity of nearly 17.7 billion gallons. Those facilities produced 15 billion gallons of fuel in 2021.

“While that is still only an 86% utilization rate, it reflects significant growth from 2020,” the RFA said in its state of the industry report. “Total production rose 7.6% over the previous year, and both output and demand continue to grow — suggesting that 2022 will be higher still.”

The industry also returned to profitability with average ethanol prices in 2021 more than 80% above average prices in 2020. In addition, average prices for distillers grains, a byproduct of the ethanol production process, were 27% higher than a year earlier. 

This profitability occurred at a time when corn prices averaged $5.99 per bushel, 74% above 2020 levels. Inflation in the overall economy reached 7%, which affected all other input costs. However, the prices of ethanol and co-products also surged and outpaced the increase in total operating costs, the RFA said. 

“Consequently, average industry profitability for all of 2021 more than doubled compared to 2020 levels,” the RFA said. 

Margins have remained positive in 2022, said Kenneth Scott Zuckerberg, lead grains industry analyst at CoBank. While ethanol fuel prices are rising along with corn prices, rising natural gas prices will crimp margins.

“There isn’t a perfect gauge to pinpoint what level of feedstock inflation could impact production, since commodity and raw material prices can be quite volatile in the short-run,” he said. 

The Black Sea region is a major producer and exporter of natural gas and fertilizer. The longer the conflict goes, the greater the risk of supply shocks, which will increase the price of natural gas globally, Zuckerberg said. 

“Bottom line, higher domestic prices for both natural gas and corn mean that ethanol producers will likely see margin compression unless fuel ethanol prices rise at a greater rate than the input costs,” he said. 

US ethanol production is unlikely to be impacted by the war in Ukraine unless gasoline prices at the pump exceed $5.50 per gallon, which is viewed as a tipping point for consumers and would lead to demand destruction. 

Nicholson agrees a production decline is unlikely, especially given the emphasis placed on sustainability, carbon emissions and environmental impacts. But as fuel prices creep up, the discussions over food versus fuel are getting louder and some are calling for changes in policies that mandate certain levels of renewable fuels usage.

“People are saying my gasoline is $5 a gallon and my food prices are going up,” Nicholson said. “They’re looking at politicians and policymakers and asking what are you going to do? Those are all relevant questions. But then you have all these things in place to deal with sustainability or carbon reductions. The policymakers put that in place; they’re not going to just give that up because prices went up.”

Zuckerberg said food supplies are adequate in the United States, so the debate is more relevant to areas facing food shortages and insecurity because of the war in Ukraine, such as the Middle East and North Africa.

Increasing the blend rate for ethanol could help reduce the price at the pump, Zuckerberg said, given that the price of non-blended gasoline is much higher than the cost of fuel ethanol. Gasoline including 15% ethanol (E15) is approved for use in vehicles model year 2001 and newer, but there are barriers to year-round sales of the fuel. The RFA is working with legislators on a bill that would broaden use of E15.

“RFA makes a strong business case for higher ethanol blends to help reduce gas prices at the pump,” Zuckerberg said. “Moving to E15 would be a win-win for both consumers and the environment, with a greater reduction in  tailpipe emissions and lower motor vehicle fuel costs. E-15 is a no-brainer.”

Brazil ethanol production

Unlike the United States, Brazil’s ethanol industry is still struggling with the impacts of COVID-19 and a tight crop due to continuing drought and severe frost. Most of Brazil’s ethanol is produced from sugar cane, but the corn-based industry is growing significantly. 

Total ethanol production in 2021 was estimated at 30.43 billion liters, a decrease of 13% from 2020, according to a report from the Foreign Agricultural Service (FAS) of the US Department of Agriculture. Ethanol from sugar cane was estimated at 27 billion liters with sugar-ethanol producers favoring sugar production due to pricing and the severely damaged sugar cane crop. 

Corn ethanol production for 2021 was estimated at 3.9 billion liters, a 40% increase from 2020, the FAS said. Production is expected to reach 8 billion liters by 2028. 

So far in 2022, corn ethanol production is continuing to grow with UNICA, the Brazilian sugar cane industry association, reporting that production in February was up nearly 39% compared with last year. 

The potential for expansion of Brazil’s corn ethanol industry is limited by local fuel demand, profitability and logistical challenges, the FAS said. Most corn ethanol is produced in Brazil’s Center-West region, close to cheap corn supplies and poultry operations that use distillers grains. Most of the ethanol is consumed in the region or distributed to buyers in 10 states in western and northern Brazil.

“One major limitation for growth of the corn ethanol sector is the low population density of the region, which corresponds to little fuel demand in general,” the FAS said. “Moreover, the options to transport ethanol out of the region are limited, with most ethanol needing to travel 1,000 kilometers or more by truck before potentially being placed on barges or larger ocean-going vessels.”

Producers are exploring options to sell to the population centers in the northeastern region, which frequently lack ethanol to meet local demand. States in southern Brazil are another target market for corn ethanol producers. 

Biodiesel concerns 

For biodiesel, the EU leads the way in production with over 30% of the market share of fuel produced in 2021. The United States is second in global production with a 20% market share.  

Biodiesel presents its own concerns, particularly when it comes to feedstock availability. Ukraine exports about 80% of the world’s sunflower oil, and overall is the largest exporter of vegetable oils. If there are supply issues as the war continues, everyone will be scrambling to source enough feedstocks for food and fuel. 

Supplies were already tight and prices high prior to Russia’s invasion of Ukraine, Nicholson said. 

“All those importers of sunflower oil from that area of the world have had to come look at other places in the world for vegetable oil, which was already tight before we got here,” he said.

It’s unclear what the planting season for sunflower seeds will look like in Russia and Ukraine, Zuckerberg said.

“Clearly there is production and export risk given the ongoing closures of Ukraine ports and sanctions placed against Russia, not to mention the fact that many Ukraine farmers are on the battlefield rather than the farm field,” he said.

Biodiesel plants already have been idling capacity, Nicholson said, noting that volumes on annual basis peaked in 2018 and have been coming down ever since. In 2020, capacity in the United States was at 2.5 billion gallons but only 1.82 billion gallons were produced. Capacity in 2021 dropped to 2.2 billion gallons, according to the US Energy Information Administration. 

“They went through a period of time where they were not covering capital costs and the increase in feedstock costs is not helping their case,” he said. 

It is important to define what we are talking about first. Biodiesel fuel uses multiple feedstocks, such as used vegetable oil, animal fat and grease, Zuckerberg said. 

“Should vegetable oil supplies remain tight, a problem could emerge for production of renewable diesel, a fuel that uses virgin vegetable oil in its production,” he said. “Clearly current events have and will continue to tighten already supply-constrained oilseed markets.”

In recent years, production levels of renewable diesel, which is made in thermochemical processes such as hydrotreating, gasification, and pyrolysis, has been increasing. Capacity in 2021 increased from 791 million gallons at the beginning of the year to 1.1 billion gallons by December. Industry leaders are estimating production could reach 6.5 billion gallons in the next five to six years.

“Right now, we have a tight vegetable oil market, but we don’t have excess demand yet,” Zuckerberg said. “If the 6.5 billion gallons of capacity comes online, the industry may face challenges should the veg oil market remain tight.”

Nicholson said companies may rethink their plans to build production facilities. 

“I do think it will slow down production or slow down the building of some of these renewable diesel refineries from those players who maybe don’t have as deep of pockets as the oil companies do,” he said.

He noted Chevron’s announcement in February to purchase the Renewable Energy Group (REG) for $3.15 billion as a move for the oil company to shore up supply. REG operates 11 biorefineries in the United States and Europe and produced 519 million gallons of cleaner fuel in 2020. He expects there will be similar deals and joint ventures in the future.

“So, we’re already seeing the renewable diesel folks doing what they need to do to ensure they have feedstocks,” Nicholson said.

Looking ahead 

Traditional biofuels such as ethanol and biodiesel may face a bumpy road with increased competition of other renewable energy options, particularly electric. Global biofuel consumption could slow sharply by 2029, according to Enerdata, an independent research and consulting firm, due to a drop in fuel demand, increased competition between transport technologies and the decarbonization trend of public policies. 

It estimates overall ethanol consumption to increase by 8.3% through 2029, while biodiesel consumption declines by 3%. The slowdown in consumption will reduce international trade, with biofuels mostly remaining a commodity produced and consumed locally.

First-generation biofuels are expected to dominate global production into 2030 with advanced biofuels not exceeding 10% of world production, Enerdata said. The EU is anticipated to have a high integration rate of advanced biofuels, followed by China, Indonesia, the United States and Brazil. 

Public policies will remain one of the pillars of development for biofuels, Enerdata said. However, the EU and the United States are favoring alternatives to biofuels to decarbonize transportation, such as electric vehicles, hydrogen and other low-carbon technologies. 

“This should lead to an increased competition from electric mobility, hydrogen and LNG while the competitivity of fossil fuels could further dampen prospects for biofuels,” Enerdata said. “Moreover, the COVID-19 crisis could market a lasting decline in mobility…”

In the United States, the government plans to end purchases of gas-powered vehicles by 2035 and California is requiring all new cars and passenger trucks sold in the state be zero-emission vehicles by 2035. Other states are considering similar policies.

Nicholson said already California’s carbon credits are telling a different story from just 10 years ago, when 80% were ethanol. That number has dropped to 20% today.

“Is that a nationwide phenomenon or just a local one? We don’t know,” he said. “If we use it as a barometer, I’d be concerned that ethanol is going to be challenged in years to come.”

He noted that investment in renewable diesel facilities is increasing, and so is oilseed crushing to meet the demand for vegetable oil feedstock, but what happens 10 years down the road if a new technology is discovered.

“What if something changes that makes the ability to find power for vehicles cheaper, safer and cleaner than liquid fuels,” Nicholson said. “What is the new technology that could upset the whole apple cart?”