Trump administration a wild card for ethanol industry

The U.S. ethanol industry set a production record last year. Exports boomed. And after a tough first six months, profits picked up in the last half of 2016, including in Minnesota.

While there are positive indicators for 2017 — corn prices are forecast to be stable and the federal mandate for ethanol production has been increased — the industry faces some significant uncertainties. Players in Minnesota, the fourth-largest producer of ethanol in the U.S., said there could be some export challenges.

Perhaps the biggest is President Donald Trump, who has strong ties to the oil industry, often ethanol's nemesis pushing against higher ethanol production.

Trump has told ethanol producers he backs biofuel, but "it's impossible to predict what he is going to do," said Bruce Babcock, professor of energy economics at Iowa State University. "This is a complete wild card."

Just this past week, discord among large ethanol companies erupted after Trump adviser Carl Icahn, who controls one of the largest independent U.S. refiners, made a deal with the president of the Renewable Fuels Association to recommend a change in policy that could directly benefit his company.

The industry is tied to the federal government through the renewable fuel standard, which was created in 2005 by Congress and reinforced two years later. It requires that biofuels be blended into gasoline.

The U.S. Environmental Protection Agency (EPA) administers the renewable fuel program. In November, former President Barack Obama's EPA mandated a record amount of ethanol production for 2017: 19.28 billion gallons. Of that, 15 billion gallons — the statutory maximum — would come from conventional biofuels, primarily ethanol.

It marked the first time the EPA had mandated the full 15 billion gallons for conventional ethanol. With a precedent set, "it will be hard to go back on that," Babcock said.

The increased mandate came at the end of a year that was an improvement for the ethanol industry over 2015, though no match for the boom of 2014. The United States, by far the world's largest ethanol producer, pumped out 15.3 billion gallons of the stuff in 2016, up 3.4 percent over a year ago.

Minnesota in 2016 contributed 1.18 billion gallons, a bit below the all-time high of 1.2 billion gallons the previous year, according to the Minnesota BioFuels Association. The decline stemmed from a shutdown of one ethanol plant during 2016, the association says.

Minnesota producers actually saw operating income fall in 2016 over 2015, the association said. Like elsewhere, higher corn prices and low oil prices that began in 2015 squeezed ethanol producers' profitability in the first half of last year. But corn costs declined in 2016's second half, and exports — needed for producers' bottom lines — rallied.

"Margins were pretty low, but as the year progressed we finished strong," said Randall Doyal, CEO of Al-Corn Clean Fuel, a farmer-owned ethanol producer in the southern Minnesota town of Claremont.

Underscoring its confidence in ethanol, Al-Corn just started site work on a big expansion, raising its capacity from 50 million gallons annually to 120 million, which would make it one of the largest ethanol plants in the state.

"As the industry grows, those plants that enjoy economies of scale are the most valuable for their owners," Doyal said. He's looking for a continuation of last year's trends for 2017, though January was a weak month for the industry. "It will be a decent year," he said, "though I wouldn't predict a barn burner."

Minnesota has 20 ethanol plants, from farmer-owned co-ops to outposts of publicly traded companies. The industry directly employs 2,264 and supports an additional 2,589 direct farm and farm-related jobs, according a recent study for the state's biofuel association.

Plus, Minnetonka-based agribusiness giant Cargill has three large ethanol plants, one in Nebraska and two in Iowa. And Inver Grove Heights-based CHS, the nation's largest agricultural cooperative, owns two ethanol plants in Illinois.

With motor fuel prices relatively low, Americans drove a record amount of miles in 2016 and gasoline consumption also hit a record, according to federal agencies. Ethanol demand rose with gasoline, as motor fuel usually contains 10 percent of the biofuel.

One positive factor is the growth of E-15, a blend of 15 percent ethanol and 85 percent gasoline that can be used in vehicles made from 2001 on. It's usually about 10 cents cheaper than E-10, the common ethanol blend.

E-15 sales in Minnesota have risen from 258,000 gallons in 2014 to 5.7 million gallons last year, according to the Minnesota Department of Commerce. There are 68 gas stations now selling the blend. "E-15 is becoming more popular in the metro area," said Brian Kletscher, CEO of Highwater Ethanol in Lamberton and chairman of the state's biofuels association.

The widespread adoption of E-15, though, is still bogged down by disputes with automakers and restrictions from the EPA. The Renewable Fuel Association's deal with Icahn, reported by Bloomberg, removes some of those restrictions in return for not opposing a rule change, which could come through a White House executive order, to remove some of the fuel blending regulations that added costs to Icahn's refinery business. The rule change, however, could add cost pressures to other players in the ethanol industry.

Sioux Falls-based Poet LLC — the largest U.S. ethanol producer with four Minnesota plants and a founder of Growth Energy, a separate trade group vehemently opposed to the Icahn move — called the agreement "a backroom deal" made while "leading voices" were absent. White House officials deliberated with all the players last week to try to reach a compromise, people familiar with the talks told Bloomberg.

However the EPA regulations change, if at all, the renewable fuel standard law essentially puts a ceiling on domestic ethanol production. So the main prospect for ethanol's growth will continue to be exports.

"Exports are the lifeblood of profits for the industry," said Scott Irwin, an agricultural economics professor at the University of Illinois. "The real frosting on the cake for ethanol producers last year was the red-hot export market."

At 1.05 billion gallons, 2016 ethanol exports were second only to 2011, according to the Renewable Fuels Association.

Brazil and Canada are the prime destinations for U.S. ethanol, together accounting for half of the industry's exports. China has become U.S. ethanol's third biggest export market over the past few years, with a 17 percent share. China is also the largest U.S. export market for distillers grains, an ethanol byproduct used for animal feed.

But China has indicated that it plans to significantly raise tariffs on ethanol and distillers grains, a potential blow to exports.

"There are definitely storm clouds on the trade side," Irwin said, heightened by the uncertainty over Trump's positions and last week's controversy.

While skepticism exists, several executives emphasize that the president has reiterated his support for the federal ethanol mandate as recently as two weeks ago.

"He is very supportive of domestic renewable energy," said Poet CEO Jeff Broin. "He will stand behind rural America and the voters who put him into office."

Bloomberg News contributed to this report.

Mike Hughlett • 612-673-7003