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US corn ethanol producers to tap into overseas demand

The Financial Times logo The Financial Times 6 days ago Gregory Meyer in New York

A drop of E85, a mixture of 85 percent ethanol and gasoline, hangs at the end of a gas pump held for a photograph by Katie Hitt at a Mobil station in Birmingham, Michigan, U.S., on Thursday, May 15, 2008. Prices for wheat, corn and soybeans have climbed to records, partly on demand for the grains to make fuels such as ethanol as an alternative to crude oil. Photographer: Daniel Acker/Bloomberg News© Bloomberg A drop of E85, a mixture of 85 percent ethanol and gasoline, hangs at the end of a gas pump held for a photograph by Katie Hitt at a Mobil station in Birmingham, Michigan, U.S., on Thursday, May 15, 2008. Prices for wheat, corn and soybeans have climbed to records, partly on demand for the grains to make fuels such as ethanol as an alternative to crude oil. Photographer: Daniel Acker/Bloomberg News

The US corn ethanol industry is increasing production capacity even as domestic fuel sales and government support reach a plateau.

Two new refineries, the first in years, are proposed in Iowa and South Dakota. They are part of a nationwide expansion that would add 500m gallons per year of capacity by 2018, according to the Renewable Fuels Association.

The US biofuels industry is the world’s largest, producing 44 per cent of global supply. It was unleashed by a law requiring a sharp rise in domestic ethanol sales.

But the federal corn ethanol mandate — which dictates minimum amounts of ethanol used in US fuel supplies — has levelled off at 15bn gallons per year, a volume the Trump administration is expected to maintain in a pending proposal for 2018. Stagnant gasoline demand is also capping sales, as most petrol sold in the US contains no more than 10 per cent ethanol.

However, these constraints have not stopped ethanol companies from building in the corn belt. With grain prices low and foreign demand robust, plants are still making a profit.

Ringneck Energy is raising equity to build a $150m, 80m-gallon ethanol plant in Onida, South Dakota. “There’s a whole new opportunity out here for an ethanol plant, as long as you can be a low-cost producer,” said Walt Wendland, Ringneck chief executive.

In Atlantic, Iowa, the Elite Octane company has broken ground on a $190m, 150m-gallon ethanol plant. “We’re not making this investment based on existence of the [mandate],” said Nick Bowdish, chief executive. “We’re making this investment because the economics of corn ethanol are very attractive to us.”

More than half a dozen other companies are raising output capacity at operating ethanol refineries, including Poet, the leading producer, which plans to double capacity in Marion, Ohio.

John Campbell of Ocean Park Advisors, an investment bank, said the expansion reflected a drive to be the lowest-cost commodity producer.

If the market weakened, as it did after a severe drought limited corn supplies in 2012, some older, higher-cost plants could be forced out while leaner operators would survive. “They want to have a chair when the music stops,” Mr Campbell said.

The last new ethanol plant opened two years ago in North Dakota, bringing the total to more than 200, said Geoff Cooper, an RFA executive. Capacity had grown within the existing fleet as operators stripped out bottlenecks and deployed enzymes that more efficiently digest corn starch, he said.

Total US ethanol plant capacity now stands at 16.1bn gallons per year, while RFA forecasts that the industry will pump out between 15.7bn and 15.8bn in 2017, well above the mandated level.

Corn grain moves along a conveyor belt from storage silos before loading onto a bulk carrier vessel in the Illichivsk Grain Terminal CJSC, operated by Glencore Plc, at Illichivsk port in Odessa, Ukraine, on Friday, May 19, 2017. Glencore's takeover approach for U.S. grain trader Bunge Ltd. highlights how much the Swiss commodity giant is longing to increase its dominance in the Americas and bust up the stranglehold exerted on the industry by four key players. Photographer: Vincent Mundy/Bloomberg© Bloomberg Corn grain moves along a conveyor belt from storage silos before loading onto a bulk carrier vessel in the Illichivsk Grain Terminal CJSC, operated by Glencore Plc, at Illichivsk port in Odessa, Ukraine, on Friday, May 19, 2017. Glencore's takeover approach for U.S. grain trader Bunge Ltd. highlights how much the Swiss commodity giant is longing to increase its dominance in the Americas and bust up the stranglehold exerted on the industry by four key players. Photographer: Vincent Mundy/Bloomberg

The gap between domestic production and consumption has been filled by exports to countries such as Brazil and Canada.

“The opportunity in the short term is in the export market,” Mr Cooper said.

The biofuels industry is pushing to increase ethanol blending rates to 15 per cent from 10 per cent, but it has encountered a roadblock with rules on ozone pollution that limit blending levels during hot summer months.

The Trump administration supports the ethanol standard, even as it has considered shifting the responsibility to blend ethanol downstream from oil refiners to fuel blenders.

Mr Wendland said: “I would argue that Trump is a champion of energy independence — that means all of the above. So if you can produce energy at a competitive price you’re going to do pretty well under this administration.”

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