Biofuel Boondoggle
America’s Biggest Corn Ethanol Producer Rethinking Future

Corn ethanol’s largest producer—and its biggest cheerleader—is taking a step back and evaluating its operations in the industry. The FT reports:

[L]ess than six years after ribbons were cut, [two corn mills] in Nebraska and Iowa and an older one in Illinois will be reviewed for “strategic options,” [Archer Daniels Midland] disclosed last week — a study that could lead to a sale.

It is a far cry from the times when ADM spent $1.3bn on the mills and lifting its ethanol production capacity to 1.7bn gallons per year. That was a heady time: crude oil prices had cleared $60 a barrel, travellers were burning record amounts of petrol and Washington had just passed a mandate requiring biofuels’ use.

But now there has been a reversal of fortunes and the value of those investments in ethanol production is now in doubt. Low oil prices and shifting politics are forcing a reckoning for the US biofuel industry, the world’s largest by production volumes. ADM, a potent ethanol advocate since opening its first plant in 1978, will be a test case.

Corn ethanol production has ballooned over the past decade, kickstarted by the 2007 Renewable Fuel Standard, a law that mandated U.S. refiners start blending ethanol into their products in volumes that increased annually. The idea behind this policy (which, it should be noted is a bipartisan success story: it was signed into law by George W. Bush and truly embraced by President Obama) was to bolster American energy security by sourcing more of our transportation fuel domestically. The whole program was given a green patina by the fact that this ethanol would be derived from crops.

But it’s been clear for many years that the RFS has been nothing but a biofuel boondoggle. Producers like ADM have been frustrated by the fact that fuel can only contain so much ethanol (blending in more than 10 percent ethanol by volume can damage engines in older cars), a phenomenon known in the industry as the “blend wall.” Refiners have complained that they’ve been required to blend more ethanol into their fuels than they’re being supplied, or that they can reasonably manage given that 10 percent blend wall. As a result, refiners have been forced to buy up Renewable Identification Numbers (RINs), credits that have subject to speculation from Wall Street.

This mess doesn’t end there, though. By incentivizing the use of more corn crops for biofuels, the RFS has raised global food prices, starving the world’s poor and perhaps even inciting riots abroad. It fleeces American drivers at the pump, and perhaps most damning of all, it isn’t even green (and may be responsible for declining wild bee populations).

ADM seems to see the writing on the wall: falling crude oil prices have made ethanol volumes less economically attractive for refiners, and political support in Washington seems to be waning (Ted Cruz won the Iowa caucuses while opposing the RFS). Is this the canary in the corn field we’ve been waiting for?

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