2018 Ethanol Producer Magazine by BBI International

DECEMBER 2018

SHIFTING

SHIPMENTS Tariï¬&#x20AC;s Reroute Ethanol Exports Page 16

ALSO

Oil Ramps Up; Railroads Brace for Pressure Page 24

RVP Waiver Analyzed Page 30

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CONTENTS

DECEMBER 2018 VOLUME 24

DEPARTMENTS 4

AD INDEX

EDITOR'S NOTE

EVENTS CALENDAR

VIEW FROM THE HILL

ISSUE 12

FEATURES

EXPORTS

Closed Doors, Open Windows Tariffs defeat opportunities but U.S. ethanol still competitive By Lisa Gibson

At the Mercy of the Markets By Lisa Gibson

Big Oil's E15 Hypocrisy: Hello Pot, Meet Kettle By Geoff Cooper

FILE PHOTO

TRANSPORTATION

Immovable Objects

Lessons learned ease rail delay concerns as oil production increases By Matt Thompson

GLOBAL SCENE

Increasing the Role of Advanced Biofuels in the US By Leticia Phillips

CLEARING THE AIR

Octane Enhancement Cannot Come from the Oil Barrel By Dave VanderGriend

BUSINESS BRIEFS

MARKETPLACE

CANADIAN PACIFIC RAILWAY

POLICY

Relieving the Pressure

Timeline for E15’s RVP waiver aims for May By Susanne Retka Schill

FILE PHOTO

CONTRIBUTION

COPRODUCTS

True Value

Factors that determine DDGS’ actual nutritional content By Jerry Thurson

ON THE COVER Tariffs in major export markets have shut out U.S. ethanol from growing opportunities and rerouted it to other promising and reliable markets.

Ethanol Producer Magazine: (USPS No. 023-974) December 2018, Vol. 24, Issue 12. Ethanol Producer Magazine is published monthly by BBI International. Principal Office: 308 Second Ave. N., Suite 304, Grand Forks, ND 58203. Periodicals Postage Paid at Grand Forks, North Dakota and additional mailing offices. POSTMASTER: Send address changes to Ethanol Producer Magazine/Subscriptions, 308 Second Ave. N., Suite 304, Grand Forks, North Dakota 58203.

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6 | ETHANOL PRODUCER MAGAZINE | DECEMBER

UNIVERSITY OF MINNESOTA

2018

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EDITOR'S NOTE

At the Mercy of the Markets At first glance, it might look like we’ve put together a depressing issue of Ethanol Producer Magazine to end the year: Export markets are constricted?

Lisa Gibson

Editor lgibson@bbiinternational.com

Oil production could congest railways again? The E15 Reid vapor pressure waiver could be delayed? Pause. Breathe. In this edition, we cover some crucial topics that have been on everyone’s minds this past year and will remain important into 2019. There’s uncertainty, sure, but our sources assure us there is hope, and there are solutions. For our cover story, I explored the foreign tariffs with the largest impacts on U.S. ethanol exports. Of course, those are China (70 percent) and Brazil (20 percent on all U.S. imports above 600,000 liters annually). Interestingly, those tariffs have affected us in different ways. China’s 70 percent includes retaliatory actions in the midst of the trade war and has effectively shut us out of that market. Meanwhile, China also is implementing a policy of E10 nationwide by 2020 and will require about 5 billion gallons of ethanol. The term “missed opportunity” doesn’t seem to cover it. Still, we’re not losing export volumes. It’s simply being rerouted to other countries. U.S. ethanol is a low-cost octane and it’s economical, even without renewables mandates. In Brazil, we’re still sending record volumes. Today, it pencils out because Brazil’s oil prices have increased. But the demand surge caused by the high oil prices is much larger than what we’ve been able to take advantage of, because of the tariff. One source estimates the missed sales at $1 billion. But focus on this: We’re still sending ethanol to Brazil, more markets are opening for U.S. ethanol and experts are hoping for an end to the trade war, sooner rather than later. Find out about the details on these tariffs and the new market opportunities, starting on page 16. In the next feature article, Associate Editor Matt Thompson did some intense research on the 2014 rail congestion that cost ethanol producers time and money. Many say the railroads favored Big Oil because it paid more per car, but the railways deny that. With predictions of another surge in oil production, we’ve talked to producers and railways to find out what lessons learned in 2014 could alleviate transportation headaches in another oil boom. Find out what they have to say on page 24. Finally, we’ll likely get our E15 Reid vapor pressure waiver. I was skeptical it would happen—and am still expecting some pushing and compromises, as the U.S. EPA says it’ll also examine renewable identification number certification—but it seems the waiver is on the way. The rule-making will begin in February, with a final rule published in May, EPA says. That’s just in time for the 2019 RVP season. With Growth Energy’s new branding campaign for E15 to become Unleaded88 across the country, the timing and potential for the blend could be enormous. We’ll be watching the progress as closely as you will. Find out what we know so far, starting on page 30. The outcomes of the topics we cover this month are unpredictable. Some sources are hesitant to speculate on the record, so we’ll watch as things unfold. The U.S. ethanol industry will keep churning out its products and sending it to the best markets, as that list continuously evolves and grows. The markets are changing, for better or worse, and we’re at their mercy. The U.S. ethanol industry will just have to continue finding the hot spots.

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2018

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VIEW FROM THE HILL

Big Oil’s E15 Hypocrisy: Hello Pot, Meet Kettle By Geoff Cooper

While President Donald Trump’s October announcement calling for the year-round availability of E15 was enthusiastically cheered by biofuel producers, farmers and consumers, it drew predictable jeers and indignation from the oil industry and its allies. And hell hath no fury like Big Oil scorned.

In response to the president’s E15 directive, the American Petroleum Institute launched a barrage of advertisements ridiculously claiming E15 can “damage engines,” “put consumers at risk,” and “void manufacturer warranties.” The API ads go on to assert that three out of four vehicles on the road are “not designed for E15.” Of course, none of those claims are true. After subjecting E15 to the most extensive testing in the history of U.S. motor fuels, the U.S. EPA in 2011 approved the use of the fuel in all light-duty vehicles built in 2001 or later. Thus, based on the most recent vehicle registration data, more than 90 percent of the automobiles on U.S. highways and byways today are legally approved by EPA to use E15 based upon their compatibility with the fuel. As for the claim that using E15 could somehow “void” warranties, the Renewable Fuels Association recently released a detailed analysis of model year 2019 vehicle owner’s manuals and warranty statements. Our study revealed that approximately 93 percent of the new 2019 vehicles arriving at dealerships and showrooms across the country are explicitly approved and warrantied by the automaker to use E15. General Motors, Ford, Fiat-Chrysler, Honda/Acura, Toyota/ Lexus, Nissan/Infiniti, Hyundai/Kia, Jaguar, Land Rover, and Mini are among the automakers that continued to clearly approve the use of E15 in 2019 vehicles. And, for the first time, Subaru joined the club by clearly listing E15 as an approved fuel for its 2019 Ascent, Crosstrek and Impreza models.

10 | ETHANOL PRODUCER MAGAZINE | DECEMBER

2018

What’s more, most bumper-to-bumper and powertrain warranties expire after 36,000 miles or three years (whichever comes first), meaning most vehicles built prior to 2015 are out of warranty anyway. Even if E15 did pose a risk, which it doesn’t, you can’t void a warranty that doesn’t exist. It’s also more than a little ironic that while the oil industry is drumming up misinformation about E15 and auto warranties, it continues to sell large volumes of low-octane gasoline (85 AKI)—a fuel that is most certainly not approved or warrantied by a single automaker. In fact, the Department of Energy and EPA warn that using gasoline with low octane can “…cause the engine to run poorly and can damage the engine and emissions control system over time. It may also void your warranty.” Hello pot, meet kettle. But the most compelling rebuttal to API’s nonsensical claims on E15 and “engine damage” is this: Americans have consumed more than 250 million gallons of E15 and driven nearly 6 billion miles on the fuel since it was first introduced in 2012 at a station in Lawrence, Kansas. That’s the equivalent of 250,000 trips around the world. And in that span, there hasn’t been a single proven or documented case of E15 causing engine damage, voiding a warranty, or, in API’s words, “putting consumers at risk.” Not one. In fact, the only thing put “at risk” by E15 is the petroleum industry’s market share and near-monopoly at the pump.

Author: Geoff Cooper President and CEO Renewable Fuels Association 202.289.3835 gcooper@ethanolrfa.org

GLOBAL SCENE

Increasing the Role of Advanced Biofuels in the US By Leticia Phillips

The Renewable Fuel Standard celebrated its 13th anniversary earlier this year and remains a foundational energy policy that enhances America’s energy security and improves the environment. Brazilian sugarcane biofuel

producers are proud of the modest but important role they have played helping make the RFS a success, especially when it comes to supplying the U.S. with clean, advanced biofuels that offer superior environmental benefits. While, as of my deadline for this column, the final RFS volume requirements for 2019 are unclear, it is safe to say that the U.S. EPA appears poised to take another step in a positive direction for advanced biofuels. Especially if the agency stays true to its proposed 12 percent increase for advanced biofuel blending requirements with at least 100 million of those 4.88 billion gallons provided by Brazilian sugarcane ethanol. But EPA could still strengthen the RFS in ways that would encourage advanced biofuels to play a greater role greening the U.S. transportation sector. Here are our top two suggestions. • Expect more from advanced biofuels We think the volume requirements should be even higher. Because under the right market conditions and with appropriate regulatory incentives, the advanced biofuel industry—including Brazil’s sugarcane industry—could produce more. EPA designates sugarcane ethanol from Brazil as an advanced biofuel because it reduces greenhouse gases by at least 61 percent compared to gasoline. Brazil currently produces more than 7 billion gallons of sugarcane ethanol each year, and typically makes between 400 million and 800 million gallons of its annual production available for other countries to import. But Brazil could export considerably greater volumes of sugarcane ethanol to the U.S. In the past, Brazil has exported a record of 1.35 billion gallons to the U.S. in one year (2008) and 164 million gallons in one month (September 2008). At a mere 100 million gallons, EPA is underestimating the volume of sugarcane ethanol that can be made available to the U.S. market under the right conditions.

• Create new incentives for the cleanest fuels One way EPA could help nudge those market conditions into a more favorable posture is by creating an incentive program that would give extra credit to the most climate-friendly biofuels. The RFS statute clearly grants EPA this authority, but to date, the agency has not exercised it. As a potential model, EPA need look no further than its program for regulating greenhouse gas emissions from motor vehicles. Under these regulations, vehicle manufacturers are required to meet fleetwide average emission standards. The fleet-wide average is generally determined by taking the weighted average of the emissions associated with each vehicle produced by a manufacturer. EPA regulations, however, create an incentive multiplier for electric and other advanced vehicles, which allows manufacturers to doublecount these vehicles for purposes of determining their fleet-wide average. Even though the Clean Air Act does not specifically contemplate such a multiplier, EPA determined it could create such an incentive to “promote the penetration of certain ‘game changing’ advanced vehicle technologies.” We encourage EPA to create a similar incentive for game changing advanced biofuels that exceed minimum RFS requirements.

Continuous Improvement

In the past six years, nearly 1.3 billion gallons of sugarcane ethanol imported from Brazil flowed into American vehicles. During this time, sugarcane ethanol comprised only 1 percent of all renewable fuels consumed by Americans, but provided more than 6 percent of the entire U.S. advanced biofuel supply. Brazilian sugarcane producers take pride in this track record of success and are eager to contribute even more. The RFS is now a teenager, and EPA must continue to play a thoughtful role guiding the program through unavoidable growing pains. We hope the agency will stay laser focused on fostering the development of advanced and cellulosic biofuels. Author: Leticia Phillips North American Representative Brazilian Sugarcane Industry Association, UNICA 202.506.5299 leticia@unica.com.br

ETHANOLPRODUCER.COM | 11

CLEARING THE AIR

Octane Enhancement Cannot Come from the Oil Barrel By Dave VanderGriend

As we get ready to turn the page of the calendar to another year, it is both a time for reflection and to look ahead. We all know there is never

a dull moment or downtime in the ethanol industry—2018 was as busy as ever. Constant threats to the Renewable Fuel Standard, rulemakings on the annual volume obligations, fuel economy rules, the vapor pressure/E15 issue, falling commodity prices, small refinery waivers, shrinking ethanol demand—all of which make it necessary to defend, explain and justify our primary product: ethanol. Sometimes lost in all the noise is perhaps the most important reason to continue to develop and use ethanol: The fact that we are saving lives. This is not overdramatic; it’s the truth. Today, at 10 percent of the motor fuel pool, ethanol is displacing the most lethal components in gasoline—toxic, carcinogenic aromatics. When lead was phased out of gasoline, refiners replaced it with an equally dangerous mix of toxic chemicals representing the worst part of the oil barrel. Aromatics, despite the genteel sounding name, are classified as toxic substances, with the family of benzene compounds taking center stage. Benzene is classified as a known human carcinogen and, as far back as 1948, the American Petroleum institute acknowledged in Congressional testimony that it was unsafe at any level. Part of our mission at the Urban Air Initiative is to understand and define our value as the ethanol industry to protect public health. To do so, we are constantly questioning the composition of gasoline and frankly, we don’t like the answers. These toxic aromatics are ubiquitous in gasoline and we will never eliminate them entirely. We can, however, displace significant volumes and in so doing improve air quality and reduce the risks of cancer, respiratory disease and even neurological disease that are increasingly linked to gasoline. Benzene is limited in reformulated gasoline areas, but it and other aromatics find their way into other areas of the country at alarming levels.

12 | ETHANOL PRODUCER MAGAZINE | DECEMBER

2018

Reputable, peer-reviewed studies from Los Angeles to Boston have concluded the public is at risk from exposure to vehicle exhaust containing microscopic particulates that are carriers of benzene and other toxics causing premature death and illness. The good news is we are making progress in getting the medical community to clearly make the connection between fuels and health. “The single most important action we can take for our children is to cure our addiction to fossil fuel,” says Dr. Federica Perera, director of the Columbia Center for Children’s Environmental Health. Like many of you, we recently submitted comments to the U.S. EPA on its proposed rule to increase fuel economy standards and reduce greenhouse gas emissions. EPA specifically asked for comments on the potential role of octane and, even more to the point, asked for comments on how this rule could assist in meeting the goals of Title II of the Clean Air Act. That title addresses all the mobile source provisions and can limit aromatics and air toxics. UAI, along with many of our supporters and partner organizations, submitted detailed comments citing the increasing body of evidence linking these aromatics to a range of health problems. While we need increased octane levels—which allow automakers to make higher compression, more efficient cars—it must not come from the oil barrel. Instead, we know that ethanol is a superior octane enhancer and a healthier alternative to current petroleum-derived octane. It appears we had a small victory with the Trump administration’s commitment to allow year-round E15 sales, but that is just the beginning. In 2019, EPA must do its job to improve fuel quality and protect public health. It can do this by opening the market to ethanol, providing consumers with a higher-octane fuel that’s less expensive, safer and healthier.

Author: Dave VanderGriend President, Urban Air Initiative CEO, ICM Inc. 316.796.0900 davev@icminc.com

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BUSINESS BRIEFS

People, Partnerships & Projects

Wilson promoted to USGC manager of ethanol trade policy The U.S. Grains Council has promoted Candice Wilson to manager of ethanol trade policy. Wilson joined USGC in September 2017 as the graduate fellow in economics and ethanol. In this role, Wilson worked on a variety of projects ranging from ethanol research to analysis of global supply and demand for coarse grains and products. In her new role, Wilson will take on the larger task of managing trade policy issues

related to ethanol, in addition to continued work on global economic analysis. “Given the number of trade policy challenges we face in the world of ethanol, Candice will have her hands full,” says Mike Dwyer, USGC chief economist. “Her work with our staff and main ethanol partners will continue to address these challenges and pursue new markets for U.S. ethanol.” Before joining USGC, Wilson completed both bachelor’s and master’s degrees

in agricultural economics at Kansas State University. Additionally, she worked as an international intern Wilson with the U.S. Department of Agriculture’s Foreign Agricultural Service in Brussels, Belgium.

Fluid Quip Process Technologies joins US Grains Council Fluid Quip Process Technologies is a new member of the U.S. Grains Council. Fluid Quip Process Technologies was founded on experience and know-how within the corn wet milling and ethanol production industries. The company’s engineering and technical leadership team has been developing new technologies and

process solutions applicable to the biofuels and biochemical industries for more than 25 years. Fluid Quip Process Technologies has industrialized multiple patented technologies geared toward enhancing the corn-toethanol dry grind process, creating alternative coproducts and supplying the growing

need for carbohydrate building blocks in the biochemical market.

Southwest Iowa Renewable Energy announces executive leadership transition Brian Cahill has retired from his position as president and CEO of Southwest Iowa Renewable Energy LLC. Michael Jerke was appointed president and CEO, effective Oct. 22. “When Brian joined SIRE 10 years ago, the plant had recently commenced operations,” said Karol King, chairman of SIRE’s board of directors. “Brian led the SIRE team as the plant achieved stable pro14 | ETHANOL PRODUCER MAGAZINE | DECEMBER

duction, and then grew from 110 million gallons per year of ethanol production to 140 million gallons. At the same time, new coproducts were added, manufacturers of other products using SIRE outputs were co-located at SIRE’s plant, many other capital improvements were implemented, and SIRE’s debt was substantially reduced, all while maintaining SIRE’s status as a premier, locally owned ethanol producer. On 2018

Cahill

Jerke

behalf of SIRE’s members, the board of directors and the SIRE team, we wish Brian the best in his well-deserved retirement.”

BUSINESS BRIEFS¦

Ace Ethanol begins construction of D3Max plant in Wisconsin D3Max LLC and Ace Ethanol LLC have started construction of the first D3Max facility at Ace Ethanol’s plant in Stanley, Wisconsin. Ace Ethanol will be the first ethanol plant to integrate the patented D3Max technology into its existing corn dry mill. “The team at D3Max, along with the Ace Ethanol team, is extremely excited to start building the first commercial-scale facility,” says Mark Yancey, chief technology officer at D3Max. The integrated facility will also employ membrane-based ethanol recovery technology supplied by Whitefox Technologies.

“We have assembled the best team with the best technologies to build the first commercial-scale D3Max plant,” Yancey says. “We are employing a fully integrated design at the Ace plant, which will make the facility one of the most energy efficient ethanol plants in the U.S. with the highest ethanol yield per bushel. The combined facilities will be so efficient that the energy use of the new integrated facility will be approximately the same as the current Ace Ethanol plant. We are very excited to make this announcement and begin the construction of what we believe will be the new benchmark for the industry.”

According to Yancey, the D3Max process is the only corn kernel fiber-to-ethanol process that will not require an independent engineer to validate the cellulosic ethanol production every 500,000 gallons of cellulosic ethanol produced. With the D3Max process, cellulosic ethanol gallons can be measured directly, avoiding the cost of recertification required by the U.S. EPA for coprocessing and in-situ corn kernel fiber processes.

BetaTec Hop Products promotes John Forte to president John Forte has been named president of BetaTech Hop Products. Since joining the company in 2014, Forte has spearheaded major strategy and organizational shifts expanding BetaTec’s global presence in multiple industries. As vice president of BetaTec, Forte implemented the U.K.-based BetaTec Innovation Centre, a state-of-the-art laboratory office that enables in-house technical integration from research and development to quality-assurance services.

“Over the course of the last four years, John has built BetaTec into a cohesive company with a global presence to serve multiple industries and customers effectively,” says Alex Barth, CEO of John I. Haas. BetaTec Hop Products is the brewing application arm of John I. Haas Inc. “John is driven by a passion to provide BetaTec’s existing and prospective customers a natural solution to the common chemical treatment regimens. John and his team continue to look for new ways of unlocking the powers

of hops for markets beyond the brewing industry.” Forte received his Master of Forte Business Administration in organizational leadership and economics from Rosemont College.

ETHANOLPRODUCER.COM | 15

EXPORTS

1.3

% CANADA SEPT 2016 - AUG 2017 332,625,259 gallons $633,088,460

265.9

SEPT 2017 - AUG 2018

2.4

SEPT 2016 - AUG 2017 49,471,365 gallons $81,479,445

SEPT 2017 - AUG 2018 48,307,090 gallons $75,645,218

SEPT 2016 - AUG 2017 29,964,663 gallons $48,568,365

SEPT 2017 - AUG 2018

336,912,398 gallons $595,997,893

% PERU

EUROPEAN % UNION (28)

109,627,973 gallons $182,076,780

172.9

% COLOMBIA SEPT 2016 - AUG 2017

13,740,225 gallons $49,880,166

SEPT 2017 - AUG 2018

37,491,414 gallons $66,782,518

CLOSED DOORS, OPEN WINDOWS 16 | ETHANOL PRODUCER MAGAZINE | DECEMBER 16 | ETHANOL PRODUCER MAGAZINE | DECEMBER

2018 2018

4.2

103.6

UNITED ARAB % EMIRATES SEPT 2016 - AUG 2017 45,519,499 gallons $65,800,553

% CHINA SEPT 2016 - AUG 2017 49,035,523 gallons $80,165,997

SEPT 2017 - AUG 2018 99,845,422 gallons $154,842,386

SEPT 2017 - AUG 2018 47,411,816 gallons $73,433,226

47.3

While the latest marketing year comparisons show an overall increase in exports to China, the market effectively shut down in April of this year, when retaliatory tariffs took effect.

% SOUTH KOREA SEPT 2016 - AUG 2017

47,300,453 gallons $85,698,027

SEPT 2017 - AUG 2018

69,691,290 gallons $122,219,933

20.2

% INDIA SEPT 2016 - AUG 2017

137,882,823 gallons $219,681,674

SEPT 2017 - AUG 2018

3.0

% BRAZIL

165,761,349 gallons $271,025,698

SEPT 2016 - AUG 2017 Exports to Brazil dipped

479,060,513 gallons $809,034,115

SEPT 2017 - AUG 2018

464,903,286 gallons $771,981,199

slightly, but the real impact of the tariffs is the inability of the U.S. ethanol industry to take full advantage of Brazil's soaring ethanol demand.

3.6

% PHILIPPINES SEPT 2016 - AUG 2017

64,882,723 gallons $109,156,336

SEPT 2017 - AUG 2018

67,227,356 gallons $103,267,554

STATISTICS FROM US GRAINS COUNCIL

Tariffs in China and Brazil have deeply affected U.S. ethanol exports, but other markets remain, new ones are opening and opportunities still abound for the worldâ&#x20AC;&#x2122;s lowest-cost octane. By Lisa Gibson ETHANOLPRODUCER.COM | 17 ETHANOLPRODUCER.COM | 17

EXPORTS Despite a 20 percent tariff rate To Brazil The steady exports to Brazil are evident quota implemented in 2017, Brain recent figures. “Today, it pencils out,” says zil has continued to purchase sig- Craig Willis, senior vice president of global nificant amounts of ethanol from markets for Growth Energy. “It might not the U.S. It was the top export destination tomorrow. We’re always at risk of market dy-

namics changing and working against us. “In spite of tariffs, we’re sending record amounts of volume right now into Brazil,” Willis says. “We’re pretty certain, by (calendar) year’s end, we’re going to have a record export year to Brazil.” Willis says exports to Brazil by the end of calendar year 2018 are expected to reach 550 million gallons. Exports to the country in calendar year 2017 totaled 445 million gallons. Willis attributes that record to the high oil prices that Dwyer says have created more opportunities the U.S. can’t take advantage of. Brian Jennings, CEO of the American Coalition for Ethanol, says while figures look good, the U.S. absolutely has missed opportunities in Brazil because of the TRQ. The tariff is in place because sugar producers have been effective in convincing the government to prop them up, he says. There’s no real justification for it, he adds. “The TRQ has to go.” Jennings and Dwyer say the expectation is that the TRQ will maintain only its current two-year shelf life, and phase out when Brazil implements its renewables policy, RenovaBio. The program aims to reduce the country’s greenhouse gas emissions by 37 percent by 2025 and 43 percent by 2030. The rules are

in the 2017-’18 marketing year—September to August—at 464.9 million gallons, according to the U.S. Grains Council. From that standpoint, the figures look great and the TRQ—20 percent on imports above 600,000 liters annually—doesn’t seem to have a significant effect. But with demand figured in, the stats look much different. “I used to think, ‘How bad could it be?’” says Mike Dwyer, chief economist for the U.S. Grains Council. “But that’s not right. Because in the past year in Brazil, the price of oil went up, domestic consumption soared and we got none of it.” The impact is about $1 billion, he adds. “The fact that we got none of their surging market, to me, is a loss. We could have doubled our exports in the past year.” The U.S. has missed out on unprecedented surging demand in Brazil, and has been effectively shut out of the Chinese market as a result of standard and retaliatory tariffs amounting to 70 percent. Before the tariffs, the two countries represented enormous export opportunities, but new markets are popping up and U.S. ethanol still is finding homes around the globe, despite its current tariff battles.

currently being drafted. Brazil has not indicated whether the TRQ life will be extended. “If RenovaBio has a carbon penalty, and then on top of that you have a TRQ of up to 20 percent, you’re dealing with compound tariffs,” Dwyer says. “So what we’ve made clear to Brazil is that we would really love to keep the cooperation going, but it’s very important to us that these two not simultaneously exist. The TRQ should fade into history, as RenovaBio is part of their future.” Dwyer adds that he hopes RenovaBio is a real environmental policy, not a disguised trade policy. The TRQ itself is a repudiation of a 2011 agreement between the U.S. and Brazil that neither would impose tariffs on the other, he says. “We’re still friends with them. We’re cooperating with them on many, many levels, but this will remain forever a problem. Why? Because we agreed the global market is best done without the use of tariffs.”

To China

In China, the tariffs have essentially killed imports directly from the U.S. “Exports to China have dropped off a cliff,” Willis says. In January, China raised its 5 percent tariff to 30 percent. In April, it increased to 45 percent in the midst of the trade war, and again in July, bringing the total to 70 percent. “We have a tariff in place that is prohibitive to U.S. ethanol working in there, and it’s shut things off,” Willis says.

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18 | ETHANOL PRODUCER MAGAZINE | DECEMBER

2018

Ethanol Exports to China by Month (MILLIONS OF GALLONS)

–0 2017 SEPTEMBER OCTOBER – 0

NOVEMBER – 8.82 DECEMBER – 38.14

–0 2018 JANUARY FEBRUARY – 33.06 MARCH – 19.8 APRIL – 0 MAY – 0 JUNE – 0 JULY – 0

STATISTICS FROM U.S. ENERGY INFORMATION ADMINISTRATION

ETHANOLPRODUCER.COM | 19

EXPORTS “But even if we fail at that and they leave it at 30 percent, the U.S. price is so competitive that we would be competitive in China. “And you’ll start to fully appreciate the market development strategy we’ve deployed in China,” Dwyer says. “I think China is going to be our biggest market.”

For Producers

TALK TARIFFS: This photo of a Brazilian ethanol plant was taken during a trip to Brazil during which the American Coalition for Ethanol, the U.S. Grains Council and the U.S. Department of Agriculture tried to convey to officials how harmful the tariff is to U.S. ethanol. PHOTO: U.S. GRAINS COUNCIL

In February of 2018, China purchased about 33 million gallons of U.S. ethanol, and 19.8 million in March, according to the U.S. Energy Information Administration. Through July, the most recent figures available at press time, the total each month is zero. Like Brazil, China also has a renewables policy moving into place, aiming for a nationwide E10 blend by 2020. “An enormous demand for ethanol would be created as a result of that,” Jennings says, adding that the figure would be north of 5 billion gallons. While China is trying to boost domestic ethanol production, it can’t meet that ambitious goal without imports, Jennings and Dwyer agree. “They’re going to enforce their mandate like we do with the Renewable Fuel Standard,” Dwyer says. “The secret sauce in ethanol mandates is enforcement. If you don’t enforce, all you have is an aspirational goal that won’t drive investment.” USGC staff spent time in China, helping train relevant parties and develop markets, he says. “We had it all tied up perfectly in China. We wanted E10, we got it. Unfortunately, now that they’re going to need imports, we’re a 70 percent duty because of the tit for tat trade tariffs that are part of the retaliation list. … As good as we are, it’s tough to be competitive in that market.”

20 | ETHANOL PRODUCER MAGAZINE | DECEMBER

Dwyer says the hope is that a solution will be negotiated to calm the escalated trade war between the Trump administration and China. “I can’t believe it would be permanent policy to have these tariffs in place. It doesn’t behoove anybody.” Jennings says, “China was a very promising, very large opportunity for us. As the lowest-cost producer, China turned to the U.S. Our exports in 2017 reflected that optimism.” Despite the steep drop-off earlier this year, U.S. Grains Council figures show exports to China in the 2017-’18 marketing year (September through August) increased by more than 100 percent, totaling 99.85 million gallons, up from about 49 million the year before. The path forward will depend on how and if countries walk back from this trade dispute, he says. “I think no one is smart enough to know what will happen. We’re in uncharted territory, in some respects, with regard to the way the U.S. is handling trade policy.” Rules that applied in the past might not apply now and into the future, he adds. But Jennings says China likely understands the value of U.S. ethanol, including its emissions benefits. “China is really desperate to clean up their smog and their air pollution.” Dwyer says the USGC would like to work with China to reduce the initial 30 percent tariff when the retaliatory penalties are removed. 2018

“The most important thing to ethanol producers today is they have access to markets, that there is demand,” Jennings says. “And we have some challenges to market access, both here and abroad. “The fact that we can’t yet sell E15 yearround hurts. The fact that the Chinese market was effectively open last year and effectively closed this year contributes to that problem. All of these things factor in when it comes to the demand equation and keeping these plants running.” President Donald Trump announced in October that the U.S. would allow E15 sales year-round, removing the Reid vapor pressure restriction between June 1 and Sept. 15. The process, however, is uncertain and the U.S. EPA later announced the rule-making would include unspecified changes to the renewable identification number compliance system. Corn prices have recently ticked up a bit and ethanol prices have fallen. “Ethanol plants are in an incredibly rough patch right now when it comes to making money,” Jennings says. In fact, many plants aren’t making money currently. Jennings points out that the U.S. ethanol industry has added more than 1 billion gallons of capacity. “We have the ability to produce a lot more than we’re using right now.” Dwyer says, “We’re disappointed because two markets we were looking forward to with big-gallon impacts on our industry have been precluded by policy action. And that’s sad because we have a great product and the world recognizes that, but in the two markets that could be game changers for us, we’re facing market problems, unprecedented in the case of China.”

To the World

Meanwhile, the low-cost, high-octane and environmental benefits of U.S. ethanol have been attractive to different markets around the

world. While about $370 million of sales to China were lost as of mid-October, that ethanol simply was rerouted, Dwyer says. â&#x20AC;&#x153;Not only did it find a home, our exports were 1.62 billion gallons, up 19 percent from the previous year and a big-time new record,â&#x20AC;? Dwyer says, referring to the 2017-â&#x20AC;&#x2122;18 marketing year. â&#x20AC;&#x153;Our product is so competitive, any product lost in China has a home elsewhere.â&#x20AC;? The Middle East purchases U.S. ethanol to blend and sell to Africa, he cites, not because of environmental benefits, but because itâ&#x20AC;&#x2122;s the economical solution. The United Arab Emirates was the third-largest destination in August this year. â&#x20AC;&#x153;Even without a mandate, it just lowers the price,â&#x20AC;? Dwyer says. â&#x20AC;&#x153;Weâ&#x20AC;&#x2122;re starting to see markets pop up that are not traditional markets and theyâ&#x20AC;&#x2122;re just doing it because the octane of ethanol, at 115, is the cheapest octane on the planet,â&#x20AC;? he adds. The benefits are creating opportunities in Indonesia, as well. â&#x20AC;&#x153;This is resonating everywhere. We can lower your bills. With U.S. ethanol, a social benefit comes with a discount.â&#x20AC;? Canada also represents a reliable market, sitting on the list as the second-largest export

destination at 336.91 million gallons in the 2017-â&#x20AC;&#x2122;18 marketing year. Itâ&#x20AC;&#x2122;s overlooked because of that reliability and proximity, Jennings speculates. â&#x20AC;&#x153;Year in, year out, Canada is among the top, sometimes the top, customer for ethanol.â&#x20AC;? And the Mexican market is ramping up, as the country has approved gas stations to start selling E10 everywhere except in Mexico City, Monterrey and Guadalajara. â&#x20AC;&#x153;Mexico is embarking on a new era and freeing up the marketplace,â&#x20AC;? Jennings says, adding that even without the three major cities, the market represents a billion gallons of ethanol demand. The countryâ&#x20AC;&#x2122;s gasoline demand is 12 billion gallons, Willis says. â&#x20AC;&#x153;No doubt, Mexico is a priority of ours to try to open up.â&#x20AC;? Currently, the countryâ&#x20AC;&#x2122;s primary source of octane is MTBE, two-thirds of which is already coming from the U.S. And Mexico currently has no tariffs blocking the market. Mexico and the U.S. are working to â&#x20AC;&#x153;cross tâ&#x20AC;&#x2122;s and dot iâ&#x20AC;&#x2122;sâ&#x20AC;? to open that market, Willis says. Taxes, logistics and permitting are being polished. â&#x20AC;&#x153;Any day now, I think youâ&#x20AC;&#x2122;re going to start to see ethanol going into that country.â&#x20AC;?

India was the third-largest export destination in the 2017-â&#x20AC;&#x2122;18 marketing year, at 165.76 million gallons. Itâ&#x20AC;&#x2122;s one of the top eight gasoline markets in the world, and one of the fastest growing. The country is a top priority for an export market, Willis says. The industryâ&#x20AC;&#x2122;s six priority export countries are: China, Mexico, Brazil, India, Japan and Canada, he says. They represent 32 percent of global gasoline demand. Worldwide, 7.8 percent of all gasoline is ethanol, Willis says. Brazil and the U.S. are doing most of the heavy lifting to get to that figure, and if removed, the global blend is 3.2 percent. â&#x20AC;&#x153;We have a huge opportunity out there,â&#x20AC;? Willis says. Author: Lisa Gibson Editor, Ethanol Producer Magazine 701.738.4920 lgibson@bbiinternational.com

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TRANSPORTATION

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Railroad delays in 2014 forced ethanol plants to slow production or find other ways to move their products. Four years later, the situation has improved, but rail traﬃc is on the rise again. By Matt Thompson

Transportation being as critical as it is in the ethanol industry, producers take notice when disruptions occur. In late

2013 and through much of 2014, ethanol shipments were stymied as harsh winter weather, heavier-thanexpected rail traffic from the agriculture and crude oil industries, and a limited supply of tanker and hopper cars all combined to create substantial railroad delays. “Ethanol producers, as well as many other businesses, depend on railroads for anywhere from a small percentage to near 100 percent of their transportation requirements,” says Brad Schultz, director of commodities and risk management for Glacial Lakes Energy LLC. “And when conditions mean service goes

down, you have problems doing business that can maybe add up to just headaches, but potentially lost business and lost opportunity.” Glacial Lakes, with locations in Watertown and Mina in South Dakota, was one of two ethanol producers to present testimony at a Surface Transportation Board hearing in September 2014. The hearing was meant to bring commodity producers and railroad representatives together to find a solution to the delays. In his testimony, Glacial Lakes CEO Jim Seurer said the company had “suffered slowdowns and shutdowns, we have lost revenue, we have missed opportunities, and we have incurred higher costs because of BNSF's mismanagement of its monopolistic workload.” Written comments from Dana Siefkes-Lewis, Redfield Energy

LLC’s chief administrative officer, presented at the hearing read, “Historically, rail turns on the tankers was roughly four weeks. We are seeing our rail turns averaging about seven weeks per car.” She added that Redfield Energy, in Redfield, South Dakota, also increased its fleet of tanker cars, an added expense for the company. Many who were at the STB’s hearing blamed the rail delays on increased crude oil movement, a view that Donna Hausvik, chief marketing officer for Redfield, maintains. “Probably the main issue back in ’14 was that [the railroads] were shipping so much crude oil, and the tracks became congested. Big Oil was paying more per car than the ethanol industry, and we really felt that that’s why our cars would sit on the side tracks and they’d get all bunched up and we had to slow our plants down.”

OFF THE RAILS: Railway congestion in 2013 and 2014 caused ethanol plant shutdowns and lost revenue. With another oil boom expected, measures are being taken to avoid those problems. PHOTO: ISTOCK

24 | ETHANOL PRODUCER MAGAZINE | DECEMBER 24 | ETHANOL PRODUCER MAGAZINE | DECEMBER

2018 2018

ETHANOLPRODUCER.COM | 25 ETHANOLPRODUCER.COM | 25

CORN TRANSPORTATION OIL Sean Broderick, distillers grains marketing manager for CHS Inc., agrees. â&#x20AC;&#x153;It seemed to me at the time that oil and frack sand were the story and stealing a lot of time from the normal grain, and â&#x20AC;Ś the normal movements that you get every year, and that was what was â&#x20AC;Ś clogging the system.â&#x20AC;? At the 2014 hearing, representatives from BNSF Railway and Canadian Pacific Railway denied favoring oil over any other commodities. They pointed to harsh winter weather, rail congestion in Chicago and record yields in the ag industry working together to strain the already-busy railroad system. â&#x20AC;&#x153;I can assure you CP is not favoring the movement of one commodity over another commodity,â&#x20AC;? said John Brooks, then CPâ&#x20AC;&#x2122;s vice president of bulk marketing sales, during the hearing. â&#x20AC;&#x153;It seems like there was a perfect

storm of factors that contributed to this extreme, unprecedented level of car requests that we received, including weather and interchange congestion. â&#x20AC;Ś At the end, the result was CP's car requests exceeded what we expected to move and could possibly ship.â&#x20AC;? Schultz tells Ethanol Producer Magazine that a shortage of rail cars compounded the issues in 2013. â&#x20AC;&#x153;Tanker cars were extremely tight going into that winter, as were hopper cars, which move the distillers (grains). Both of those were functions of that first upward surge in crude oil movement. So even if you wanted to and were willing to get more cars to kind of help get through that difficult winter, they were not available at any price.â&#x20AC;? Glacial Lakes and Redfield slowed production, but many at the hearing said the critical information needed to plan for slow-

ing wasnâ&#x20AC;&#x2122;t coming. Both BNSF and CP vowed to improve their communication, and the STB instituted reporting requirements to help get information to shippers.

Current Congestion

Those reporting mechanisms are still in place four years later and are available to the public on the STBâ&#x20AC;&#x2122;s website. The reports show an improvement in the statistics from four years ago. During the week of Oct. 12, 2014, BNSF reported the average dwell time at origin for ethanol units was 26 hours. For the week of Sept. 29, 2018, that number had dropped to 14.1 hours, while the average train speed for ethanol units has increased to 22.3 miles per hour, over the 2014 speed of 20.2 miles per hour. CP reported a weekly average dwell time at origin for ethanol at 21 hours for the same week

in 2014. In 2018, that number was 29.3 hours, but train speed had increased from 17.1 miles per hour to 24 miles per hour. These improvements came despite a resurgence of oil production from the Bakken shale formation in western North Dakota, as well as an increase in production out of the Permian Basin in Texas. In July of this year, production in North Dakota was averaging more than 1.2 million barrels per day. The Permian Basin produced more than 2 million barrels per day from January through July of 2018. Although oil production is once again increasing, and demand on the rail system continues to be steady, neither Hausvik nor Broderick have been made aware of any issues that could impact rail shipments soon. â&#x20AC;&#x153;I think that, just based on what weâ&#x20AC;&#x2122;ve heard, [the railroads] are able to see the Bakken rise on

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the future, and as far as I can tell, theyâ&#x20AC;&#x2122;ve been gearing up for it,â&#x20AC;? Broderick says. Amy McBeth, director of public affairs for BNSF, says that while rail traffic during the first six months of 2018 increased 5 percent over last year, the railroad will â&#x20AC;&#x153;continue to be focused on meeting the needs of all our customers.â&#x20AC;? Hausvik says Redfieldâ&#x20AC;&#x2122;s thirdparty marketer, Eco-Energy, deals mostly with BNSF on Redfieldâ&#x20AC;&#x2122;s behalf, and they were provided an update earlier this year. Rail volumes have increased year-overyear, and the expectation is that theyâ&#x20AC;&#x2122;ll continue to do so. â&#x20AC;&#x153;What theyâ&#x20AC;&#x2122;re telling us is, â&#x20AC;&#x2DC;Yep, it was up last year and itâ&#x20AC;&#x2122;s up another six percent this year,â&#x20AC;&#x2122;â&#x20AC;? Hausvik says. She adds that, according to Eco-Energy, the main reason rail traffic is increasing is the nationwide truck driver shortage.

BY THE NUMBERS: Surface Transportation Board statistics show terminal dwell times for BNSF and CP since the congestion issues in 2014. SOURCE: SURFACE TRANSPORTATION BOARD

There was a small slowdown for rail service in the spring of 2018, but Broderick and Hausvik

attribute that to weather, rather than the uptick in oil production. â&#x20AC;&#x153;You had things like wild

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fires and storms and avalanches and that kind of thing,â&#x20AC;? Broderick says. â&#x20AC;&#x153;The things that happened

CORN TRANSPORTATION OIL in nature were seemingly slowing it down more than, say, added demand for oil cars or frack sand cars.” He adds that rail service is back to normal for CHS DDGS marketing. Schultz says the same for Glacial Lakes and that capital improvement projects undertaken by BNSF since 2014 have helped. McBeth says BNSF has spent about $6 billion on improving and maintaining track along the Northern Corridor during the past five years. “I know in 2017 their plan was to spend over $3 billion on capital, a lot of that on tracks, a lot on locomotives, and that is down from the couple years before that,” Schultz says. “I’m here to tell you that, as a shipper, I can see it and feel it.” CP has also invested in capital improvements since 2014. As of late October, the railway estimated it will spend $1.6 billion on improvement projects, including track upgrades and obtaining new hopper cars, by the end of 2018. This comes after spending more than $1 billion annually since 2014 on capital improvement projects. For Redfield, rail service began to return to normal after it sought assistance from Sen. John Thune, R-S.D., Hausvik says. “We started corresponding with his office, and he was sitting on the STB at that time, which really helped.” After that, BNSF utilized locomotives that had been in storage and sought assistance from other railroads. Broderick, Schultz and Hausvik all note that communication from the railroads has improved as well. “It does seem like the railroad is cognizant of the fact that you need information to run your business, and they seem to do a lot better job of providing that than they did,” Broderick says.

Moving forward

After 2014, both Redfield and Glacial Lakes undertook projects to help ease the burden of potential rail service delays. Hausvik says Redfield increased on-site ethanol storage by adding two 1 million-gallon storage tanks, nearly doubling its storage capacity. In 2014, Redfield also trucked some of its product to a storage facility in southern South Dakota, Hausvik says. If service were to slow down again, moving product by truck would be more challenging. She says it’s been harder to find trucking companies recently than it was in 2014, because of the nationwide driver shortage and stricter trucking industry regulations. Schultz says Glacial Lakes also added more on-site storage at its Watertown plant. But it also went a step further. “We did convert the Watertown plant, which at the time was single manifest, to a unit shipper. It was fully operational February of 2017. Along with becoming unit capable, we added 4.5 million gallons of ethanol storage as part of the same project.” During Seurer’s 2014 testimony, he said BNSF had suggested adding unit shipping capabilities to help with congestion. At the time, Seurer said he wasn’t sure the cost of the upgrade would offer enough benefit. But Schultz says the project has proven its worth. “We’ve been extremely pleased with the investment and how we’ve been able to operate it since that, and it’s been better than what we’d expected.” That investment has allowed Glacial Lakes to save money by leasing fewer cars, and it helps with rail congestion, as there are fewer cars on the line, Schultz says.

28 | ETHANOL PRODUCER MAGAZINE | DECEMBER

2018

SUPPLEMENTAL STORAGE: Redfield Energy LLC added two storage tanks to its plant following the rail delays in 2014. The two 1 million-gallon tanks nearly doubled the plant’s storage capacity. PHOTO: REDFIELD ENERGY LLC

COPING WITH CONGESTION: After the railroad delays experienced in 2014, Glacial Lakes Energy LLC converted its Watertown, South Dakota, plant from single manifest to unit shipping capable. PHOTO: GLACIAL LAKES ENERGY LLC

While rail service has improved, Hausvik notes that it has come with a cost, and she expects that cost will continue to rise. She says Redfield is a single manifest facility and has seen two rate increases from BNSF this year, amounting to about 2 cents per gallon for ethanol. Typically, the yearly increase is $100 per car, per year, at the most, she says. This

year, both increases were $300 per car. “They’re seeing more ethanol volume on the rail line than ever before and they believe they can continue to take the rates higher,” Hausvik says. Author: Matt Thompson Associate Editor, Ethanol Producer Magazine 701.738.4922 mthompson@bbiinternational.com

POLICY

WAIVER ON THE WAY: President Donald Trump announced in October that E15 would receive the Reid vapor pressure waiver that will clear the way for the fuel—branded Unleaded88 by Growth Energy and its retailer partners—to be sold year-round. PHOTO: MICHAEL K. MCCANN

RELIEVING THE PRESSURE There’s movement at last to obtain an RVP waiver for E15, but it might not come in time to make a difference next year. By Susanne Retka Schill

30 | ETHANOL PRODUCER MAGAZINE | DECEMBER

2018

POLICY The news came in mid-October: “We want to eliminate the intrusive rules that undermine your ability to earn a living, and we will protect the corn-based ethanol and biofuels that power our country,” President Donald Trump was quoted in an Oct. 11 White House fact sheet. It outlines his directive to the U.S. EPA to expand Reid

vapor pressure (RVP) waivers to E15 and increase transparency in the RIN market. Good news, indeed, but ethanol industry trade organizations voiced cautionary notes. “We’re going to be actively engaged and involved in the process,” says Geoff Cooper, president and CEO of the Renewable Fuels Association. “The announcement by President Trump is just the beginning of the process and it’s incumbent upon us to see this process through to a successful conclusion.”

“We’re extremely optimistic and certainly thanks go out to the president and all our congressional champions,” says Chris Bliley, Growth Energy’s vice president of regulatory affairs. “We do need to remain vigilant and make sure this gets done.” “There’s a very tight window between today and June 1,” says Brian Jennings, CEO of the American Coalition for Ethanol. “The big-picture goal is for the proposed rule to be out for public comment and for EPA to wrap up a final rule prior to that June 1 date when low RVP season kicks back in.” In a statement released Oct. 25, Jennings says EPA bureaucrats already appeared to be “slow-walking” the rule, and oil refiners were threatening to sue over the waiver. The lack of an RVP waiver for E15 is a barrier the industry has been working to dismantle for many months. Many describe it as an outdated regulation that never anticipated blends higher than E10. In response to summer ozone concerns, Congress amended the Clean Air Act in 1990, giving the U.S. EPA authority to regulate the evaporative emissions of gasoline, requiring an RVP limit of 9 pounds per square inch (psi) from June 1 to Sept. 15 to reduce ground-level ozone and smog in the summer. As straight fuels, both ethanol and gasoline have relatively low RVP. As they are blended, RVP increases until peaking at just under E10, at which point the RVP curve turns downward. Most of the gasoline used in the U.S. today is E10, with an RVP of about 10 psi. The Clean Air Act provides a 1 psi waiver for fuel blends containing gasoline and 10 percent ethanol. In 1991, EPA interpreted that section of the act to limit the waiver to gasoline with 9 to 10 percent ethanol, because 10 percent was the maximum amount allowed in gasoline at the time. In 2011, EPA approved the use of E15 in vehicles model year 2001 and newer, but did not extend the E10 RVP waiver. E15’s RVP is actually better than E10’s, and its tailpipe emissions are lower than that of E10.

Critical Timeline

Getting the waiver updated to cover E15 has been far from simple. For a while,

32 | ETHANOL PRODUCER MAGAZINE | DECEMBER

2018

it was generally believed that EPA questioned whether it had the legal authority. Jennings reports that conversations with EPA indicate that’s not the case. “I’ve never had a conversation with a career bureaucrat at EPA that (included), ‘We don’t think the law allows us to do this,’ or, ‘We don’t agree with you that E15 has a better evaporative emissions profile than E10,’” Jennings says. “In other words, they agree with us on the legal authority and that E15 makes sense from an environmental standpoint. It’s

simply that some of those forces in EPA have not wanted to do it, and no one has forced them until, hopefully, now.” A week after the initial announcement, the administration released a timeline for regulatory actions, where it said EPA expects to publish the proposed rule in February. Once the rule is published, it will be open for public comment for 30 to 60 days, likely followed by a public hearing. The administration’s timeline shoots for a final rule to be published in May.

PERFECTING THE PUMPS: Retailer Partners in Growth Energy’s Prime the Pump initiative are rebranding their E15 as Unleaded88. With an RVP waiver, the fuel and brand have a better chance of spreading to smaller fuel stations across the country. PHOTO: MICHAEL K. MCCANN

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POLICY EVENT

RIN TRANSPARENCY Coupled with the E15 RVP waiver announcement, the Trump administration says it is requesting rule changes to increase transparency and prevent price manipulation in the renewable identification number (RIN) market. While less is known about the details of the RIN proposal in development than the E15 RVP waiver, a few industry spokesmen shared what they have learned.

Geoff Cooper, Renewable Fuels Association, says a few details are known but, “it is our understanding that this proposal will not be seeking formal adoption of any particular reform, instead seeking feedback and comments on certain ideas.” RFA supports changes that would improve transparency, but not any proposals that would constrain liquidity.

“Our understanding is EPA is going to put some ideas out there around transparency,” Growth Energy’s Chris Bliley says. “On a positive note, there’s not going to be a RIN cap or RINs tied to global exports, some of the bad ideas discussed earlier.” The big concern will be that nothing impedes retailers’ ability to sell higher blends.

“We’ll have to see the details,” ACE’s Brian Jennings concurs. He points to a White House fact sheet issued Oct. 11 that indicates potential changes such as the prohibition of nonobligated parties from purchasing separated RINs, public disclosure when RIN holdings exceed specified limits, limiting the length of time a nonobligated party can hold RINs, or requiring the retirement of RINs for compliance be done in real time.

Meeting that timeline will be critical, if the RVP waiver for E15 is to take effect before the June 1 driving season arrives. “These rule makings can be complicated,” Cooper says. “They involve lots of stakeholders with lots of different opinions. Our work is just beginning for securing RVP parity for E15 and ensuring the president’s commitment to getting this done is seen through.” He expects the proposed rule to lay out a few options. “I think we’ll see a few different concepts on how to interpret different provisions of the statute,” he says. “We think there are some very defensible interpretations that would stand up to legal challenge.” “We’ve had lots of discussions with EPA,” Bliley says. “The entire industry has presented some of the best arguments for how they can do this legally. We expect them to lay out their process of how they can do 34 | ETHANOL PRODUCER MAGAZINE | DECEMBER

it under the law, and in the most defensible way possible. And, we certainly expect our opponents in the oil industry to come out and attack.” A legal challenge could, of course, delay implementation, even if EPA meets the tight timeline.

Demand Growth Potential

Predictions vary on how quickly RVP parity for E15 will translate into significant ethanol demand. Jennings predicts hundreds of millions of gallons in the short term, but cautions, “We shouldn’t oversell it, because half of the retailers are under some sort of contract restriction—a branding or supply agreement with an oil company that limits the choices they have.” Predictions of 5 billion to 7 billion gallons in the long term, however, are fair, he says, although it will take time.

2018

“Certainly E15 year-round will stimulate demand,” Cooper says. “How much a demand boost we get in the near term remains in question. We’re not going to go from 1,400 stations selling E15 today to half the market tomorrow. It’s going to take time. But this is an action that has to be taken in order to expand the marketplace.” The scale of the gasoline market is huge, he points out, with 250 million light duty vehicles and 140,000 gas stations, adding that it took 30 years for E10 to grow from a niche product available in a few states to 90 percent of the marketplace in 2009. Bliley points with optimism to undecided independent retailers. “This is a clear signal to the market that a retailer will be able to sell E15 year-round without having to change the labels. Honestly, we’ve had retailers on the sideline waiting for that to happen. We expect 1.5 billion gallons over

the next five years once E15 year-round comes into being.”

Retailer Response

Immediate responses indicate that growth will come. Within a week of the administration’s directive to EPA on the waiver, two large retailers announced E15 expansions. Casey’s General Store, a Midwest convenience store chain, will expand its offering of E15 to more than 500 of its locations over the next few years. Casey’s first offered E15 in April 2017, at 17 sites in Illinois, Iowa and Kansas. And Cumberland Farms, a Massachusetts-based chain in the Northeast, announced it will begin offering E15 at more than 120 of its stores. Since starting with its stores in North Carolina in 2015, Pennsylvania-headquartered Sheetz now has 240 locations offering E15, or about 40 percent of its stores in six states. With four seasons of relabeling dispensers for the summer driving season under its belt, Mike Lorenz, executive vice president of petroleum supply, says it was never a smooth transition. “Not only was there a cost to relabeling dispensers twice a year, but the confusion caused with consumers hasn’t changed.” The chain would see an increase in sales until June 1 that dropped off when the labels changed to say FFVs only. “Then it’s very difficult coming out of the summer driving season to get those sales back.” “I think giving E15 a level playing field with all the other grades of gasoline is huge,” he says. “The conversation trying to explain this to the consumer is more than difficult. It’s the only grade of gasoline that has this restriction.” Early on, Sheetz developed an educational brochure on E15, but Lorenz says the gasoline transaction is low-engagement—people want to get their gas and be on their way. “They don’t want an education about gasoline, let alone about RVP and waivers.” The typical nickel a gallon discount for E15 (branded Unleaded88 at Sheetz) compared to regular 87 speaks more loudly. Growth Energy has launched a nationwide campaign to market E15 as Unleaded88. The name was chosen following years

of research, focus groups and interviews with consumers at the pumps. It allows brand recognition and reduces confusion, according to Growth Energy. It starts with about 20 large retailers and, with the E15 waiver, hopefully spreads to many smaller ones. Lorenz says fixing the year-round availability issue is going to encourage many retailers who have stood on the sidelines, seeing the opportunity, but not willing to hassle with the summer labeling changes. “We’re extremely excited and applaud Pres-

ident Trump for seeing the true value in getting this antiquated regulation fixed for American drivers, corn farmers and ethanol producers. It’s a huge benefit.” Author: Susanne Retka Schill Freelance journalist retkaschill@yahoo.com

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COPRODUCTS

TRUE VALUE The actual nutritional and economic appraisal of DDGS is more complex than simply measuring profat content. By Jerry Shurson

Ethanol plants have a tremendous opportunity to capture greater economic value from distillers dried grains with solubles. It will require a new way

of thinking about what is measured and what those measurements mean for optimizing feeding applications of DDGS in precision animal nutrition feeding programs. There is a huge difference in the chemical content of DDGS measured in the laboratory and the actual nutritional and economic value of DDGS in animal feeds. The gap needs to be bridged between chemical composition data used in the commodity market to establish price, and nutritional composition data used by nutritionists to determine actual feeding and economic value.

Avoid simple measurements

First, itâ&#x20AC;&#x2122;s important to note that using simple ideas and simple solutions to assess DDGS value has its pitfalls. Oversimplifying can result in inaccuracies. For example, extensive DDGS research has shown that the actual metabolizable energy content of DDGS sources for pigs and poultry is poorly associated with crude fat content alone. Research also shows that color (lightness and yellowness) of DDGS sources is not an accurate predictor of amino acid digestibility. Therefore, nutritional composition of DDGS should be eval-

IN THE LAB: Jerry Shurson (right), professor in the Department of Animal Science at the University of Minnesota, analyzes feed samples with thendoctoral student Ran Song (left), who is now the research and development manager for Nutriquest. PHOTO: UNIVERSITY OF MINNESOTA

uated using a more comprehensive approach to accurately capture true feeding and economic value. It is also essential for DDGS and corn coproduct producers and marketers to understand the types of nutritional composition data required by animal nutritionists. To do this, coproduct producers and marketers need to consult and work closely with animal nutritionists to provide essential nutritional composition information to their customers. Table 1 (p. 39) provides a summary of most of the essential nutritional composition measures for DDGS usually required by nutritionists. Mycotoxins are a significant concern for nutritionists because the feeding and economic value of DDGS can be significantly diminished when feeding contaminated DDGS sources.

CONTRIBUTION: The claims and statements made in this article belong exclusively to the author(s) and do not necessarily reflect the views of Ethanol Producer Magazine or its advertisers. All questions pertaining to this article should be directed to the author(s).

38 | ETHANOL PRODUCER MAGAZINE | DECEMBER

2018

COPRODUCTS

Table 1. Common energy and nutritional composition measures used by nutritionists to evaluate and use feed ingredients in feed formulation Measure

Poultry

Swine

Ruminants

Energy system

Apparent metabolizable energy or true metabolizable energy

Metabolizable energy or net energy

Net energy for maintenance, net energy for gain and net energy for lactation

Fiber system

Crude fiber

Neutral detergent fiber, total dietary fiber, or nonstarch polysaccharides

Acid detergent fiber and neutral detergent fiber

Protein/amino acid system

Available amino acids

Standardized ileal digestible amino acids

Rumen degradable protein and digestible rumen undegradable protein

Phosphorous system

Available phosphorous

Standardized total tract digestible phosphorus

Total phosphorous

Sulfur

Important in dietary cation-anion difference (DCAD); is a measure of electrolyte balance

Important in DCAD

Essential - total

Sodium

Important in DCAD

May be important in DCAD

Aflatoxins â&#x20AC;&#x201C; B1, B2, G1, G2

Highly susceptible

Least susceptible

Deoxynivalenol

Moderately susceptible

Highly susceptible

Least susceptible

Fumonisins â&#x20AC;&#x201C; B1, B2

Moderately susceptible

Highly susceptible

Least susceptible

Zearalenone

Moderately susceptible

Highly susceptible

Least susceptible

Mycotoxins

Profat Vs. Actual Nutritional Value

In the current feed ingredient commodity market, the purchase price of an ingredient is based on minimum guarantees for crude protein and crude fat, which are often combined as profat for marketing DDGS. Crude protein and crude fat are components of the proximate analysis scheme that was first developed in 1865 by Henneberg and Stohmann of the Weende Experiment Station in Germany and has been used since to characterize the general composition of animal feed ingredients in the commodity market. However, these measures are grossly inadequate for determining actual nutritional value and are not used in formulating animal diets today. In contrast, animal nutritionists use energy and digestible protein/amino acids, and available or digestible phosphorus to meet the nutritional requirements of dairy, beef, swine and poultry. These nutritional composition measurements are related to the proximate analysis measures, but are quite different when capturing full nutritional and economic value of DDGS. The key for determining the true nutritional and economic value of DDGS involves relating chemical analysis measures obtained in the laboratory to the digestibility and physiological responses in animals. For example, although we can measure the total oil (crude fat) content in DDGS, it does not mean all of this oil is digestible by the animal or that it contributes to metabolizable energy content. In fact, studies have shown that the digestibility of crude fat among DDGS sources ranges from 53 to 81 percent for swine. This means the combination of oil content and digestibility, along with the fiber

and crude protein content and digestibility, determines the actual metabolizable energy content of DDGS. Crude protein is measured by determining the nitrogen content of a feed ingredient and multiplying the value by 6.25 to estimate the percentage of intact protein and amino acid content. The value of 6.25 is derived from the generalization that the average nitrogen content of an amino acid in intact proteins is 16 percent (1/16 = 6.25 percent). Therefore, crude protein does not actually measure the concentration of intact proteins in a feed ingredient. In fact, several studies have shown that the crude protein content of corn and DDGS is poorly correlated with its amino acid content. Furthermore, the crude protein content of a feed ingredient can be misleading and overestimated if nonprotein nitrogen compounds, such as ammonia or urea, are added to feed ingredients because they contribute nitrogen that is measured in the analysis. Therefore, although crude protein and crude fat analysis is relatively simple, inexpensive and widely used around the world, animal nutritionists do not use these measures to formulate animal feeds because they are highly inaccurate indicators of utilizable energy and digestible amino acid content of DDGS and other feed ingredients.

Beware the Disconnect

Nutritionists use shadow pricing approaches with least-cost feed formulation software to determine the maximum price for DDGS to enter into the diet formulation based on its energy and digestible nutrient content relative to the cost and nutritional composition of competing ingredients. ETHANOLPRODUCER.COM | 39

COPRODUCTS Table 2. Proximate analysis of two commercially available corn DDGS sources DDGS Source A

DDGS Source B

Difference (A - B)

Moisture (%)

11.1

11.3

-0.2

Crude protein (%)

26.6

25.7

0.4

Crude fat (%)

5.8

8.7

-2.9

Profat (%)

32.4

34.4

-2

Crude fiber (%)

6.7

7.1

0.4

Ash (%)

4.3

4.8

-0.5

Nutritional Value ($/metric ton)

279

219

Prices: DDGS spot price - $182/MT, corn price - $138/MT, soybean meal price - $343/MT

To show an example of the inadequacy in using profat for pricing DDGS, actual proximate analysis data for two commercially available DDGS sources (A and B) are shown in Table 2 (above). Most DDGS buyers would select source B because it has greater profat content (34.4 percent) than source A (32.4 percent), assuming source B has greater nutritional and economic value

than source A. However, when the actual chemical composition data of these DDGS sources were used as inputs in energy and digestible amino acid prediction equations to provide nutritional composition data, shown in Table 3 (p. 41), DDGS source A actually had greater economic value ($279 per metric ton) than source B ($219 per metric ton) in a growing-finishing swine diet. This is a dif-

ference of $60 per metric ton in economic value between these two sources, which may be sold at a similar price. In addition, the actual economic value of both DDGS sources exceeded the spot price of $182 per metric ton (based on the price assumptions for corn and soybean meal at the time of the comparison).

COPRODUCTS Table 3. Estimated energy, standardized ileal digestible (SID) amino acid and available phosphorus content of two DDGS sources in growing-finishing pig diets DDGS Source A

DDGS Source B

Difference (A - B)

Metabolizable energy (kcal/ kg)

3,180

3,001

171

Net energy (kcal/kg)

2,278

2,141

137

SID Lysine (%)

0.63

0.45

0.18

SID Methionine (%)

0.58

0.42

0.16

SID Threonine (%)

0.86

0.62

0.24

SID Tryptophan (%)

0.17

0.14

0.03

Available phosphorus (%)

0.65

0.66

-0.1

SOURCE: ROB MUSSER, NUTRIQUEST

The reasons for the greater economic value of DDGS source A compared with source B is that it contained greater metabolizable energy, net energy and digestible amino acid content, despite having lower profat content. Similar nutritional and economic value differences also exist among DDGS sources for ruminants and poultry. These results provide a real-world example of lost

pricing opportunities for DDGS producers and marketers to capture more revenue. This disconnect between analytical methods and chemical composition measures used to determine price of DDGS and the measurements used to formulate animal diets and determine actual economic value frequently results in the inability of ethanol plants to capture a greater proportion of

the true economic value of DDGS. Consequently, DDGS is often marketed at a lower price than the actual economic value it provides in complete animal diets. Author: Jerry Shurson Professor, Department of Animal Science, University of Minnesota shurs001@umn.edu

ETHANOLPRODUCER.COM | 41

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