Posted on: February 21, 2011 in Congress, E15, Ethanol, Energy, Environment, Exports, Fuel, Land Use, National Ethanol Conference, Production

2011 State of the Ethanol Industry

February 21, 2011

National Ethanol Conference

Phoenix, Arizona

Bob Dinneen

President and Chief Executive Officer

Renewable Fuels Association

As prepared for delivery:

“While always volatile, the environment affecting alternative energy technologies has been in an acute state of turmoil and uncertainty. … The administration has embarked on an economic revival program based on massive budget cuts, new tax laws, and market oriented policies that have either totally eliminated, or put in great doubt, existing federal government commercialization programs and tax incentives.  Last, but not least, press treatment of the alcohol fuels industry has been generally shallow and uniformed, and the general public is receiving an increasingly negative view of its value and potential.”

I should note here that I am quoting a memo to the RFA Board of Directors summarizing the state of the ethanol industry written by the first RFA President, Dave Hallberg, in 1981! 

Dave went on to cite the inimitable comic strip character Pogo, “We are faced with insurmountable opportunities,” concluding with a familiar sense of optimism that they would be realized. 

Dave Hallberg was right in 1981.  Those “insurmountable opportunities” were realized in 1982 and every year since because RFA members, like Ron Miller, rose to the challenges of the moment while staying constantly and immutably focused on the future.

That has been the hallmark of the RFA and this industry for the past 30 years.  When faced with great challenges, we unite, we do our homework, we build coalitions, we educate, we persevere, and we prevail.

When the Reagan Administration tried to eliminate the federal ethanol program, we succeeded in extending it, and we have extended it four times since.  When cities across the country were plagued by carbon monoxide pollution, we created an oxy-fuel program that moved ethanol from just an octane enhancer to a clean air tool and we effectively eradicated CO as a pollutant in major metropolitan areas.  When MTBE was found contaminating the nation’s drinking water, we ramped up production, opened new markets, and saved the nation’s reformulated gasoline program that remains, today, the single most important and effective weapon in the fight against urban smog.  After 9-11 shook the nation from its complacency about energy security, we worked with President Bush, Congress and the American Petroleum Institute to forge the most progressive renewable energy policy in the world by creating a Renewable Fuels Standard that required refiners, for the very first time, to utilize an increasing percentage of ethanol in gasoline.   And when that program proved successful, we worked with a whole new coalition of consumer groups and environmentalists to expand the RFS five-fold just two years later, forming the foundation of today’s ethanol industry from which new technologies and new feedstocks can evolve.

So as I contemplate the state of the ethanol industry in 2011, I do so with the backdrop of history that assures me this industry can and will meet today’s challenges as it has met every “insurmountable opportunity” of the past, and that we will, once again prevail.

But make no mistake; the challenges facing our industry today are as vexing and complicated as any we have ever faced.  We need to rise to these new challenges.  We need to step up our game.  We need to build new bridges, forge new coalitions, and offer new ideas.  We need to be flexible in our approach, disciplined in our message and recognize the limitations of government support in an era or unimaginable debt and competing priorities.

As we resolve to move forward, let’s remember how far we have come.

The American ethanol industry is no longer a Midwest phenomenon.  We are no longer biting at the ankles of the petroleum industry.  We are now one-tenth of the nation’s gasoline supply and we are growing. 

As we gather here today, the US leads the world in ethanol production with 204 biorefineries in 29 states across the country.  We produced more than 13 billion gallons of ethanol last year alone.  It took the industry its first 16 years to produce 13 billion gallons of ethanol at all, let alone on an annual basis. 

The American ethanol industry added $36 billion to household income and contributed $53 billion to the Gross Domestic Product.  We contributed $7 billion in tax revenue to the federal treasury.  We contributed another $4 billion to state coffers.  And we can claim no small measure of credit for revitalizing our communities and providing the resources for education, infrastructure and emergency response needed across rural America.

And in an era of chronic underemployment, the US ethanol industry last year helped employ more than 400,000 Americans, with more than 70,000 in direct employment at the plants, on farms, at construction companies, and elsewhere– good, high-paying jobs with benefits, opportunity for advancement and a secure future.  These are jobs that won’t be exported, jobs that build communities, jobs America needs.

2010 was also the year the American ethanol industry entered the global marketplace in a big way.  We exported a record 400 million gallons of ethanol last year, with product going to Europe, Canada, and Asia as well as, surprisingly, Brazil, the United Arab Emirates and Saudi Arabia.  That’s right; American ethanol is now being used to fuel the limos of Middle East oil sheiks and South American sugar barons.

2010 also saw meaningful steps toward the commercialization of cellulosic and advanced ethanol.  The Department of Energy awarded a loan guarantee for the first time to a cellulosic ethanol project that will use municipal solid waste to produce ethanol at a facility in Nevada.  The Department of Agriculture recently surpassed DOE’s effort by awarding three more loan guarantees to cellulosic ethanol projects in Alabama, Florida and Mississippi.  Combined, these projects will result in more than 83 million gallons of cellulosic ethanol production in the very near future. 

Still, the ethanol industry is not yet where we want to be, not where we need to be if this nation is ever to break its dependence on imported oil and take a more meaningful step toward a sustainable energy future that stimulates economic growth and gives Americans a choice at the gas pump.   

We were recently reminded of the precarious position our nation’s economic and energy security are in as a consequence of ours, and the world’s, reliance on oil from the Persian Gulf.  When a cry for freedom in Cairo can shoot oil prices skyrocketing because of angst that the 2 million barrels of oil a day that flow through the Suez Canal is threatened, we have a problem.  But consider the consequences of further unrest across the canal.  What would happen if the 50 million barrels a day that flow through the Strait of Hormuz were threatened?  We’ve seen it before.  We know the havoc of gas lines and the economic catastrophe that follows skyrocketing oil prices.  Just recently, and not caused by political conflict, the record oil prices of 2008 created a worldwide economic tailspin from which we are just now beginning to emerge. 

When will Washington learn that the only way to truly extricate ourselves from the grip of foreign oil dependency is to have a committed, consistent and comprehensive energy policy that recognizes the power of innovation and the promise of renewable fuels?

Today, Washington is consumed with putting its fiscal house in order - disorder created in no small part by the economic turmoil caused by the $140 per barrel oil price and the subsequent economic free fall.  Congress and the President are facing a mountain of debt.  The $1.5 trillion budget deficit now represents almost 10% of our GDP.  And the astonishing $14 trillion national public debt is about equal to total GDP.  Reigning in spending and balancing the budget will be the number one priority over the next several years.  Capitol Hill is now ruled by bean counters and its affects will be seen in every bill moving through Congress.

If the President of the United States is willing to put heating assistance for poor Americans on the chopping block - if the Congress can cut NASA, funding for local police, rural development programs and food assistance for low income women, infants and children – then few programs will be spared.  Everything is on the table; or should be. 

Several weeks ago, the Senate considered an amendment to strip certain tax incentives from the petroleum industry.  Oil industry lobbyists cried foul, and the amendment failed.  Apparently, despite the President’s admonition in his State of the Union speech that these companies were doing just fine on their own, the Congress is not yet ready to end the subsidies that move energy investments overseas, export jobs and encourage development in more and more ecologically sensitive areas, whether it’s the Gulf of Mexico or the pristine forests of Canada. 

Congress does appear ready to end the ethanol tax incentive program, however.  At least, end it in its current form and cost.  Last December, with the committed leadership of Senator Chuck Grassley and President Obama, the Congress extended, for one year, the Volumetric Ethanol Excise Tax Credit – VEETC.  It is now set to expire at the end of this year.  But the message from that debate was unambiguous.  Our industry needs to work with Congress and the Administration to reform the tax incentive moving forward.  We will.  Indeed, I welcome a dialogue about the future of the ethanol tax incentive.

But that dialogue ought not to have a myopic focus on VEETC.  We ought to be encouraging a more sophisticated conversation about all motor fuel tax policy – and all energy tax policy in general.  We must address the permanency of tax incentives for very mature and profitable energy industries with the “extenders game” played with renewable energy technologies.  We need to determine how best to insulate consumers and producers from the wild gyrations of the world oil market.  We need to encourage investments in infrastructure and flex fuel vehicles such that consumers are finally empowered to make the energy choices right for them and their vehicles.  And we need to be discussing how we can finally and assuredly commercialize new technologies using new feedstocks, and continue the evolution of the biofuels industry such that it is sustainable, both environmentally and economically.

We also we need to make sure that if the still emerging biofuels industry is doing its part to reduce government debt, then the entrenched petroleum subsidies are on the table as well.  After all, it’s more than just market access that will determine our future; it is market economics first and foremost.

There are lots of proposals to reform the ethanol tax incentive, and all should be properly vetted and fairly considered.  We should avoid the pettiness of whose idea it is, and focus on what will be best for the industry and the taxpayer.   There are those who believe a refundable producer tax incentive will be more politically viable than a market based incentive. Some would limit the incentive only to gallons above the RFS obligations, or make it available to only mid-level ethanol blends and E85.  Others believe we should phase down the incentive while phasing in mandates for FFVs and blender pumps.  The environmentalists would like a carbon-based performance credit.  And still others have proposed a variable tax incentive tied to the price of oil and/or crush margins that would provide a consumer safety net, assuring ethanol demand if the price of oil falls while reducing or eliminating the incentive when it’s not needed to drive consumer demand. 

Frankly, each of these has both advantages and disadvantages.  But we must allow a dispassionate debate, based on fact and market analysis, and guided by political reality.  Ultimately, the arbiter will be Congress, and we will all have to live with the consequence.

There are also competing proposals as to how to best catalyze investment in cellulose and advanced ethanol technology.  Is it a refundable investment tax credit, a performance contract that would reward successful technologies or simply a more aggressive Apollo-like government grant program to get plants built?  The industry needs to rally around a specific proposal soon, or existing policy will be the default and investment may continue to languish.

The RFA is committed to fostering such a dialogue and providing a forum for cellulose and advanced ethanol companies to come together.  We have formed the Advanced Ethanol Council to provide a unique and expert voice for policy makers, the media and the public on issues related to advanced and cellulosic ethanol. 

I can assure you that an expiration of the tax incentive is a very real possibility.  Budget constraints, seemingly unavoidable gridlock and dysfunction, and the mixed messages Congress is hearing from the industry and agriculture these days may lead them to take no action at all.   Such an outcome would put the future of this industry in jeopardy.  While this outcome is possible, it is by no means predestined. 

We need to unite.  We need to focus our agenda; this is not a time for a wish list.  We need to develop the technical support Congress will demand.  And we need to go to Capitol Hill, speaking AS one voice, educating the more than 100 new Members of Congress that are new to this debate and may only have learned about ethanol from the pages of the Wall Street Journal.  If we do that, as we have when facing the insurmountable opportunities of the past 30 years, we will succeed again.  If we don’t, we will miss a critical opportunity to move this nation further away from imported energy.

Beyond the halls of Congress, there is also much work that needs to be done to expand markets.  Last month, EPA announced its approval of E15 for 2001 and newer vehicles.  That was great news.  But much work still needs to be done to encourage gasoline marketers to offer E15 to consumers.  We’re doing that work.  The RFA is partnering with Growth Energy on health effects testing.  That testing is complete and has been submitted to EPA.  We anticipate that companies will be able to utilize that data in the fuel registration process that should begin soon. 

We’re also working with other stakeholders to eliminate state regulatory barriers to the use of higher level ethanol blends.  Already, we believe several states, including Iowa, Ohio and Illinois, are ready to use E15 as soon as marketers begin blending. 

We’re awaiting EPA’s final action on labeling E15, and we are hopeful the Agency will revise its proposed label, which we believe is unnecessarily alarmist and unsupported by the record.  EPA can’t justify a label that says “this fuel may damage other vehicles.”  Exempt lawn mowers if you need to, but there is NO evidence suggesting an issue with any vehicle.  EPA’s label must go.

Ultimately, EPA needs to make E15 available to all vehicles.  2001 and newer cars represent approximately 60% of the vehicle fleet.  And while that’s a good start and it will grow as newer vehicles replace the legacy fleet, it still leaves far too many consumers without an option to use E15 and it undermines the potential marketplace impact of EPA’s decision.  The analysis the RFA released last fall, prepared by the highly regarded automotive engineering firm, Ricardo, clearly demonstrated there is NO reason not to approve the use of E15 for vehicles older than 2001.  There is no difference in emissions control equipment, materials compatibility, driveability or regulatory construct between a 2001 vehicle and an older model that would justify denying the opportunity to use E15 to all consumers.  Ronald Reagan did not passionately tell the Kremlin to “tear down 60% of that wall.”  And we shouldn’t be satisfied with a partial waiver of our blend wall either.  If E15 can power the cars at Daytona yesterday, it can power the carpools in suburban America tomorrow. 

2011 should be the year we begin to hammer away at the ethanol blend wall.  But the obstacles to meaningful market penetration for E15 are great and not going away.  The opponents to E15 use are highly motivated and well-funded.  While I give little chance to the federal lawsuit to stop E15, efforts in Congress to reverse EPA’s decision continue to mount.  And the liability concerns of marketers related to misfueling shouldn’t be summarily dismissed. 

The RFA is going to continue to work with marketers to address their concerns.  We’ve jointly supported legislation with the Petroleum Marketers Association to provide a pathway forward.  In Iowa, Secretary of Agriculture Bill Northey is working with the industry and insurers to find a solution that may prove to be a model for other states.  I applaud his effort and any others to address these concerns.  Ultimately, moving beyond E10 is critical to us all.  Without expanded market opportunities, it will be exponentially more challenging to secure investments in the next generation of ethanol technologies.  We need markets.  That’s why the oil industry is fighting so hard.  That’s why we have to fight back even harder.  This isn’t about weed whackers; it’s about the future growth and increased market opportunities for your fuel.

That’s also why the food vs. fuel canard, which has been recycled for 30 years now, will likely be resurrected with new vigor again this year.  US farmers grew about 12 ½  billion bushels of corn last year.  It was the third largest corn crop in history and the fourth in a row more than 12 billion bushels.  Yields exceeded 152 million bushels per acre, meaning we’re growing twice as much corn on the same amount of land as we did when the RFA was formed.  How?  Why?  In large part because the increased demand for grain created by the ethanol industry is enabling innovation and driving increased productivity on the farm and in the labs of seed companies across the country.  We need to start taking credit for it.  And we need to tell people that it is innovation and advanced technology that hold the key to meaningful economic development in impoverished parts of the globe.  The biggest threat to food supplies isn’t biofuels, it’s underinvestment in agriculture and, more significantly, it’s skyrocketing energy costs.  Energy touches every element of food production, marketing and distribution, from the fertilizer used to produce the crop to the plastic it’s stored in to the diesel used to get it to the grocery store. 

You all know there’s less than 5 cents worth of corn in a box of corn flakes and that only 20 cents of every food dollar goes to the farmer.  What you may not know is that the grain used in U.S. ethanol production represents only 3% of the world’s grain supply on a net basis and none of its food grain supply.  Despite poor weather in Russia and elsewhere, world grain supply remains strong.  The global supply of wheat, rice, and coarse grains is estimated at 2.67 billion tons, the second-largest supply ever—trailing only last year, and by less than 1%.  There is simply no justification for blaming ethanol for world food prices.

But enthusiastic Malthusians and other doomsday prognosticators will not be deterred.  They will use recent crop reports to blame biofuels for food insecurities that have existed for decades.  But the facts are on our side.

A March 2010 report by the United Kingdom’s Department for Environment, Food and Rural Affairs found that “Available evidence suggests that biofuels had a relatively small contribution to the 2008 spike in agricultural commodity prices.” Even the World Bank, which in 2008 suggested biofuels was playing a large role in higher food prices, released an analysis in July 2010 that found “…the effect of biofuels on food prices has not been as large as originally thought…” and that “…the use of commodities by financial investors may have been partly responsible for the 2007-08 spike.”  No kidding.

These influential institutions are seeing the light because we’ve been floodlighting the facts.  The fact is:  ethanol is just using the starch from the corn.  The fact is:  the protein feed value is retained and used as a valuable livestock feed.  And the fact is: the American ethanol industry produced a record 32.5 million metric tons of high value feed last year, representing nearly $4 billion to the industry’s balance sheet and the equivalent of the total amount of grain consumed by all the cattle fed on feedlots across the country.  Where’s the food vs. fuel argument there?

Ironically, just as we hit the blend wall in 2010, we’re also now running up against the feed wall, as domestic markets for DDG are becoming saturated.  As a consequence, last year we saw a dramatic increase in DDG exports.  In fact, one out of every four tons of distillers grains produced today is exported. US marketers shipped an estimated 9 million metric tons of DDGs to more than 50 countries across the globe, with a quarter of that going to China.  The demand for protein and energy feeds generally and DDGs specifically will only continue to grow as the world economy recovers and Third World diets improve.  At a DDG conference the RFA co-hosted with the US Grains Council last fall, the demand for DDGs was palpable as more and more international animal nutritionists and feeders recognized the value of the concentrated protein and energy in DDG. 

I remain convinced that refuting the food vs. fuel canard is as important to cellulosic ethanol producers as it is to grain processors.  The reason is: The debate really isn’t about food.  It’s about land.  Already we’ve seen some environmentalists criticizing cellulosic ethanol with as much vitriol as they commonly reserve for corn ethanol because of groundless concerns about land and water resources. 

We’ve made headway over the past year in our ongoing effort to return some semblance of rational thought to the indirect land use debate and ethanol’s carbon scoring.  You will recall that an environmental activist, Tim Searchinger, teed up the ILUC fervor in 2008 with a phony analysis suggesting that ethanol’s carbon footprint was actually twice as bad as gasoline because when you used an acre of land in the production of biomass for ethanol, a corresponding acre of rainforest would be destroyed in the Amazon.  Incredibly, regulators jumped on this faux science before it had been properly studied.  The RFA has led the effort to force scientific scrutiny and last year we began to reap the reward. 

Using the GREET model developed by the U.S. Department of Energy’s Argonne National Laboratory, 13  billion gallons of ethanol production last year reduced greenhouse gas (GHG) emissions from on-road vehicles by 22 million tons.  That’s the equivalent of taking 3.5 million cars and trucks off the road!

EPA’s final RFS rulemaking concluded that a typical grain ethanol plant, even with the ILUC penalty, is on average 21% better than gasoline.  And if the ILUC penalty was removed, an average plant today would reflect a 48% reduction in carbon—within a hair’s breadth of the 50% threshold for advanced biofuels.  In April, Purdue released a study using the same model employed by California that reduced ILUC to about 14 g/MJ, down from Searchinger’s far-fetched 104 g/MJ.  Over the summer, the DOE’s Oak Ridge National Lab released a report showing “minimal to zero” ILUC  resulted from American corn ethanol expansion between 2001 and 2008.  Last fall, even the California Air Resources Board’s expert working group essentially recommended cutting CARB’s ILUC number in half.  Facts are stubborn things.  Last year, Brazil released data demonstrating that deforestation has dropped precipitously since 2004, and shows NO correlation to increased ethanol production in the U.S. whatsoever. In fact, Amazon deforestation rates in 2010 were at their lowest point since the Brazilian government began collecting data in 1988.

But we’re not done yet!  Better data and analyses will undoubtedly show that ILUC from US biofuels expansion is insignificant, particularly when compared to the direct and indirect environmental impact of other fuels, like tar sands or lithium for electric cars, which have so far escaped any comparable level of scrutiny. 

Resolving this issue successfully remains a priority.  The ethanol brand has been tarnished by the inscrutable accusations of an environmental lobby intent upon undermining production agriculture.  While carbon policy might be on hold in Washington DC for the moment, I continue to believe that future energy policy will be inextricably linked to carbon performance, and if biofuels are to claim their appropriate role in that future, we need to correct what is now an incomplete and inaccurate assessment.

2011 will be an important year for the ethanol industry.  We will be facing many challenges.  We’ll need to reform the tax incentive.  We’ll need to stimulate investments in cellulose and advanced ethanol production and finally see commercialization in this sector.  We’ll need to open E15 market opportunities and continue to encourage investments in blender pumps and E85 infrastructure.  We’ll need to address the myriad of technical issues constantly facing a growing industry, from rail safety to octane certification to carbon scoring.  We’ll need to respond to the growing chorus of naysayers, those that will exaggerate the impact of ethanol on food to those that misrepresent the effects of ethanol on marine engines.  And we’ll need to do all of this in a political environment more focused on cutting than spending.

We will have no chance whatsoever if divisions within the industry, across agriculture, and among biofuels continue to distract from the bigger picture.  We need to spend less time arguing about who is right and more time doing what is right.  As long as we’re more focused on what trade association you belong to than what the right policy should be; as long as ranchers are pitted against farmers over the price of grain and food processors ignore the price of oil; as long as we’re arguing the relative merits of a “drop-in” fuel vs. an ethanol molecule and whether investments in infrastructure help or hurt; we’re going to condemn our children to a future ever more reliant on imported petroleum. 

One way or another, change is coming to this industry.  The question is how will we respond?  What will we do to make this change for the better?

We need to do what the RFA has done for 30 years – build bridges.  We need to build a bridge wide enough for the entire biofuels industry to cross to a more sustainable energy future.  We need to build a bridge to our customers and consumers so the road to increased ethanol use is paved with understanding.  We need to build a bridge to lawmakers so that we end up with a motor fuel policy befitting a 21^st century energy industry.  And we need to stride confidently across this bridge with enough vision, strength and innovation to conquer the insurmountable opportunities of our time.

Thank you.

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