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June 05, 2015 02:00 AM

OTHER VOICES: Why corn farmers can't ignore ethanol edict

Crain News Service
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    (Bloomberg News photo)

    By Joe Cahill, Crain News Service

    CHICAGO (June 5, 2015) — The ethanol combine suffered another setback last month when U.S. Environmental Protection Agency (EPA) officials unveiled proposed rules that cut the amount of the alternative fuel refiners must use.

    The EPA proposal would reduce the minimum required volume of corn-based ethanol in gasoline to 13.4 billion gallons in 2015 and 14 billion gallons in 2016 across the country — below a congressional target of 15 billion gallons for each year.

    While the EPA had previously suggested even lower minimums, the new levels still caught many in the industry off-guard. “It was surprising that they set the 2015 level so low,” said Jerrod Kitt, a research analyst who studies biofuels for Linn Group Inc., a privately held Chicago-based Futures Commission Merchant (FCM) specializing in Grain Futures Trading.

    (Crain News Service photo)

    Joe Cahill

    Yet the federal agency's move is consistent with a recent shift in sentiment toward corn-based ethanol in Washington, D.C., which has propped up the industry since its inception. For years a powerful combination of environmental and agricultural interests, along with ethanol producers like Chicago-based Archer Daniels Midland Co. (ADM), kept the government subsidies coming.

    That began to change as questions arose about ethanol's environmental effects, and a new breed of congressional Republicans skeptical of all government subsidies cast a gimlet eye on ethanol. In 2012, lawmakers allowed an ethanol tax credit to lapse.

    Next on the hit list was the “renewable fuel standard,” which required gasoline refiners to mix increasing amounts of ethanol with petroleum. When fuel consumption slowed in recent years, those mandates pushed the required levels of ethanol toward a so-called blend wall of 10 percent, an amount many older car engines can't handle.

    ‘Ridiculous nonsense'

    Under pressure from various quarters, not least the oil industry, EPA officials signaled in late 2013 that annual ethanol mandates wouldn't necessarily keep rising. The agency's action on May 29 showed they weren't kidding.

    Although the proposed rules won't take effect until a public comment period ends in November, Illinois corn interests were quick to share their views. “My initial reaction was to say out loud, ‘You've got to be kidding me,'” said Ken Hartman, president of the Bloomington-based Illinois Corn Growers Association, in a statement.

    Deriding the proposed rules as “ridiculous” and “nonsense,” Mr. Hartman went on to accuse the EPA of violating federal law by setting volume minimums below congressional target levels.

    The vehemence reflects ethanol's importance to corn farmers. Nearly 40 percent of their crop goes into ethanol, more than any other product. With record harvests depressing corn prices, farmers need more ethanol demand, not less.

    Mr. Hartman's statement also hints at the litigation likely to ensue if the EPA sticks to its guns. “Should EPA finalize levels in line with today's proposal, we believe biofuel advocates could challenge the reduced volumes, regardless of the methodology or waiver authorities the agency cited,” analyst Tim Cheung of Clear View Energy partners wrote in a report.

    ADM, meanwhile, offered a measured response to the EPA action. “We look forward to submitting comments to the EPA as part of their review process, and to working with policymakers in the administration and on (Capitol) Hill to support the American biofuels industry,” a company spokeswoman said in an email.

    Accentuating the positive, ADM noted that also on May 29 the U.S. Department of Agriculture said it would pony up $100 million to help gas stations install pumps for E15, a fuel with 15 percent ethanol. Such pumps are seen as critical to boosting ethanol consumption over the long term.

    The spokeswoman added that ADM is focusing on ethanol exports, which are rising sharply.

    ADM moves on

    There are other reasons for ADM to take the EPA news in stride. For one, raw volumes aren't as important to ADM as they are to farmers. Even as the company's ethanol sales fell 5.8 percent last year, its ethanol profits more than doubled to $704 million, thanks in part to the low corn prices that are squeezing farmers.

    Ethanol also is a smaller piece of the action for ADM than it is for many corn farmers. Despite its position as the largest producer of corn-based ethanol, ADM got just under 10 percent of its $81.2 billion in total revenue from the business unit that sells the stuff. While last year's booming ethanol profits accounted for 18 percent of ADM's 2014 operating profit, the volatile business line lost money as recently as 2012.

    ADM's agricultural services and oilseeds businesses are the largest by far, with more than $30 billion in annual revenue apiece. High-fructose corn syrup, another business that generates more than its share of controversy, is even smaller than ethanol for ADM.

    The company has emphasized diversification in recent years, both within existing business lines and by moving into new areas like specialty flavorings.

    “ADM has a diverse and versatile business model,” the company spokeswoman said. “In the corn business unit alone, we continue to expand the portfolio of products we can make from corn. Already our corn business makes more than two dozen products from the starch in corn. We continue to focus on enhancing margins across our portfolio by growing demand for existing products and developing new products. Products like sorbitol, lysine, soluble fiber and propylene glycol are helping us further strengthen margins and profits.”

    ADM is smart to limit its reliance on ethanol, a business that will survive only as long as fickle politicians deem it worthy of government support. Maybe corn farmers should do likewise.

    Columnist Joe Cahill wrote this piece for Crain's Chicago Business magazine, a sister publication of Tire Business.

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