Corn, ethanol, drought, and demand

Corn plays an important role in current United States transportation fuel policy - but environmental and economic factors are putting the pinch on corn ethanol producers.

The U.S. Renewable Fuel Standard program requires transportation fuel sold in the United States to contain at least a minimum volume of renewable fuel.  This renewable fuel is generally ethanol, produced by fermenting sugars contained in plant feedstocks like sugar cane and sugar beets, or sugars produced by converting plant-based starches like corn starch.  The program's goals include reducing greenhouse gas emissions from the transportation sector, reducing petroleum imports, and encouraging the development and expansion of the domestic renewable fuels sector.

In the U.S., more than 95 percent of operating ethanol plants reportedly use corn starch as their feedstock.  According to the U.S. Department of Agriculture, U.S. farmers planted 96.4 million acres of corn this year, the highest corn acreage since 1937.  Favorable field conditions this spring led to the quickest planting pace on record, with nearly all of the corn planted by May 20 and plants emerged by June 3.

This summer's high temperatures and widespread drought conditions - with nearly 56% of the area of the 48 contiguous states experiencing drought - have hurt the U.S. corn crop, resulting in reduced estimates for this year's crop.  This anticipated reduction is driving corn prices up, with the commodity trading at over $7 per bushel (contrast a 2007 U.S. Energy Information Administration analysis of transportation biofuels assuming corn prices of about $2 per bushel).  This price increase is cutting into ethanol producers' bottom line.

At the same time, transportation fuel consumers are driving less.  Between increased fleet efficiency prompted by both governmental mandates and a natural desire to cut costs, and the overall slowdown in the national economy, overall demand for ethanol fuel has not grown at the pace previously projected.

According to Reuters, the average ethanol plant operating in Illinois is currently losing 32 cents on every gallon it produces.  As a result, many ethanol plants are running below their production capacity, and several have announced planned closures.  EIA data shows that ethanol production dropped 4% last week to 821,000 barrels per day, the lowest production rate since July 23, 2010.

Proponents of blending ethanol into transportation fuels point to its nature as a renewable biofuel, lower cost than gasoline, and ability to be produced domestically.  Critics question the wisdom of converting a potential food crop into an energy commodity, as well as the economic and environmental consequences of current pro-ethanol policies.  Whatever the ultimate outcome, the climatic and economic conditions affecting the corn ethanol industry may be calling into question the sustainability of the current system.

POET ethanol plant declines DOE loan guarantee

Cellulosic ethanol producer POET LLC has declined a $105 million federal loan guarantee for its planned "Project LIBERTY" facility in Emmetsburg, Iowa, instead turning to private funding from Dutch company Royal DSM NV.  This choice has implications both for energy policy and for the biofuels industry.

Last year brought an end to a US Department of Energy program to help fund innovative energy projects with loan guarantees.  Before it ended in September 2011, DOE's Section 1705 loan guarantee program backstopped a total of $16 billion in loans for 28 projects ranging from nuclear power to solar, wind to transmission, biofuels to energy efficiency.  Questions about the value and implementation of the loan program grew after the recipient of the first loan guarantee, solar panel maker Solyndra LLC, failed and went bankrupt.

Before the Section 1705 loan program ended, POET was awarded a guarantee for $105 million.  POET is developing the Project LIBERTY plant, which aims to use cutting-edge enzymatic hydrolysis to produce fermentable sugars from corn crop waste, and then to use special yeasts to transform the sugar into usable ethanol.  By 2013, the plant could be producing up to 25 million gallons per year.

This week POET announced that it was declining the DOE loan guarantee.  Instead, POET will partner with Royal DSM, a private business that grew out of a former Dutch national coal-mining company.  Together, the companies will invest up to $250 million in initial capital expenditures for Project LIBERTY.

What does POET's choice mean?  For POET, the terms of the joint venture with Royal DSM are presumably more favorable than the alternative.  Royal DSM's money is likely what made it most attractive to POET, but its experience and markets may have also played a role.

For Iowa, any financial arrangement that realizes $250 million in capital investments in the state is likely to be greeted with open arms.

For other ethanol producers, the deal may signal increased interest in ethanol from the investment community.  The  U.S. Environmental Protection Agency estimates that its renewable fuels standards will require 16 billion gallons of advanced cellulosic biofuel per year by 2022; using the Project LIBERTY plant as a model, this could mean up to 400 new biorefineries will be built by 2022 to meet these standards.  By extension, other recipients of DOE loan guarantees may similarly partner with private-sector entities to complete project financing.