THE BIG READ: E15 penetration key in providing US corn energy lifeboat

With global corn stocks swelling and little sign of slowing production despite clear price signals, the US corn industry could be thrown a lifeline in the form of higher demand from the ethanol industry as gasoline with higher blends find a foothold in the US retail space.

Record ethanol production has seen ever larger volumes of US corn consumed in the energy mix, with the demand providing a constant baseline regardless of the fluctuation in production levels.

Over the last three marketing years, ethanol production has consumed more than a third of US corn production, making it the crop’s biggest sole consumer.

And it is on track to do the same again this year, with 5.525 billion bushels – some 140 million mt – of US corn set to head into the ethanol mix for the 2017/18 marketing year, according to the USDA.

This is a trend which looks as though it is growing at a faster pace, with the industry already consuming half of its USDA forecast in the first five months of the marketing year, at a time when production typically slows down on slack winter driving demand.

The adoption of the Renewable Fuel Standard in the US is the now well-established and recognised bridge between the agriculture sector and the energy space, but some in the industry are starting to take note of the influence of higher-than-expected ethanol blends being felt in the US market.

Agricensus analysis of EIA data shows that, at an assumed conversion rate of 2.8 gallons per bushel, production has already consumed 2.309 billion bushels since the start of the 2017/18 marketing year.

If production averages a million barrels a day through to the end of the marketing year, wholly feasible as the late January through end-August period of 2017 averaged 1.021 million barrels per day, then the USDA’s total would be surpassed by 144 million bushels, or 3.6 million mt.

Big Oil prices lend a hand
The interplay between mineral oil and renewable oil prices are key influencers of consumption, with the equation heavily skewed towards mineral oil over the last decade as prices have been relatively low - on both an outright basis and versus higher renewable prices.

As car fleets renew, some of the fears around the blendwall – the effect of increased biofuel blending mandates outpacing the practical capacity of pumps and vehicles to accommodate ethanol blends above the 10% governed by the E10 standard – have eased.

Key to realising that has been adoption of ethanol blends that go higher than the mandated 10%, with the industry keeping one eye on expansion and the domestic market has provided a substantial target to swing at.

However, attempts to jump straight from E10 to much higher levels – such as E85 – have foundered amid negative headlines and technical limitations, with car technology not yet ready and opposition from Big Oil proving too much for the ethanol industry to overcome.

That has seen the ethanol industry readjust its expectations and push for adoption of E15 and look to E25.

BIP me baby, one more time
Backing retailers and providing funding for infrastructure to accommodate higher blends was a key step, and it met legislative encouragement with an Obama-era initiative in the Biofuels Infrastructure Partnership (BIP).

Announced at the tail end of the previous administration, the BIP was recently wrapped up under Donald Trump, prompting some headlines around the new administration’s priorities and whether this was another effort to unravel initiatives deemed cumbersome and a burden to business.

But the BIP spent the $100 million dollars it had been allotted, and according to the USDA, it spent it on infrastructure adding 4,880 pumps and 515 tanks at 1,486 stations across 21 states.

Even oil states were not spared, with Texas receiving the greatest amount of the funding – $17 million to install 763 pumps.

“The idea was to jump start the program for blends above 10% ethanol,” Ron Lamberty, American Coalition for Ethanol's Senior Vice President told Agricensus.

“E85 is where equipment costs go up; BIP was meant to give some early adopters a "push" to make the change thinking that, when other retailers see it being done, more of them would follow,” Lamberty explains, with the government-backed $100 million matched by the station owners themselves.

“It's getting that job done,” he said.

Get into the groove
US ethanol production got into its stride through the tail end of 2017 according to EIA data, consolidating production levels above 1 million barrels per day and setting a record high for production at a time when US driving demand is far from its peak.

As a result, stock levels have surged and production margins thinned, leading some to warn that the wheels are about to come off.

However, the epic production of ethanol has continued to surprise, and some have pointed to the BIP and other programs as key in connecting flex fuel ready cars with greater options at the pump.

“One of the other important things was to prove that you could pass the blendwall,” Lamberty said.

According to retailer applications for BIP grants and information collected by the states administering those grants, there are more than 1,300 stations across 29 states that offer E15 currently.

In comparison there were just 100 locations offering the higher blend in 2015.

“By the end of the year the number should be more than 1,500 with infrastructure currently in the pipeline from the BIP program,” Lamberty said.

However, while there are not a lot of locations that offer E25, new pumps that are being installed are expected to be able to ramp up the blend volume to those levels with little additional investment.

“The basic UL pump standard covers blends up to 10% ethanol, and the manufacturers guarantee those pumps up to 15% ethanol mixes. Now Wayne, one of the largest pump companies in the US, is making their base dispensers to meet the UL E25 standard, The difference is just a matter of a different seals and gaskets. The cost to do E15 - or even E25 can be virtually zero,” Lamberty continued.

That compares with E85 pumps where different metals have to be used and the cost can run into thousands of dollars per pump.

Furthermore, once installed, the pumps give marketers greater flexibility and will have a 10-15 year lifespan.

“When you see a program like this succeed, you hope it has – if nothing else – it has inspired curiosity and inspired some confidence,” Lamberty said.

That confidence comes at a time when US export markets for corn face greater competition than at any time before and exports of finished grade ethanol are limited by political wranglings and anti-dumping fears, making the domestic market an ever greater prize for the corn complex.

“It can’t hurt,” Advance Trading’s Kelly Herrick said of expanded domestic demand.

“We have to figure out some way to increase some domestic consumption, otherwise we are going to reach capacity on ethanol exports,” Herrick told Agricensus.

And, with ethanol stock levels jumping by one million barrels in the week ending January 19 to 23.8 million barrels, that dynamic will be a key one to watch through the slower demand months of February and March.