Ethanol production capacity over 14 billion gallons

(article published by Reuters news service, By Carey Gillam)

(Reuters) – The U.S. biofuels industry has more than 14 billion gallons in annual production capacity for fuel ethanol, according to new industry and government data, but growth has hit a plateau and experts see steady but slow capacity growth going forward.
A government report issued Tuesday shows fuel ethanol industry maximum sustainable capacity at 193 plants capable of churning out 14.2 billion gallons a year or 929,000 barrels a day. The data, issued as a first-ever report by the Energy Information Administration, is nearly a year old, based on information as of January 1, 2011.
Still, data reported by the industry as of November 16 showed 209 plants producing about 14.2 billion gallons a year, less than the estimated capacity of 14.7 billion gallons.
“You’re essentially in the plateau stage of the ethanol boom,” said Linn Group analyst Jerrod Kitt. “There are a few expansion projects under way … but we’ve essentially boomed out. Now we are just tottering along.”
RFA spokesman Matt Hartwig said that the rate of expansion was slowing as the domestic market neared the saturation level and approached the mandate set by the Renewable Fuels Standard which requires oil companies to use 15 billion gallons of ethanol by 2015.
An uptick in export demand is notable but not enough to drive the double-digit rates of expansion in capacity seen in past years, Hartwig said.
Neill McKinstray, vice president of The Andersons Inc ethanol division, said ethanol supply and demand are in balance and margins are strong.
Domestic demand is expected to slip in early 2012, however, and export demand likewise was seen softening, he said.
The vast majority of the U.S. ethanol refineries use corn as their feedstock. Corn prices have fluctuated sharply this year but have been in decline over the last several months.
A few plants also use barley, milo, sugarcane, beer, potato waste and wood waste. Some plants in Minnesota, Wisconsin and California use cheese whey.
“Corn ethanol is in good shape to meet demand,” said Jim Stark, a spokesman for Green Plains Renewable Energy, the fourth-largest U.S. ethanol producer.

Our Take:
We lucked out, just in the nick of time. An unforeseen economic reality is making up for bad policy—just as we appear to be losing the blender’s credit, the strength of the world sugar market allows US ethanol producers to sell a small fraction of our production into the European Union, and even Brazil, where sugar is competing directly with its biofuels production.
This export market will provide the space for the continued build out of US ethanol production capacity—until such time that E15, as well as the increasing number of flexible fuel vehicles and fueling sites generate domestic demand for that new fuel production. This is our escape valve from the blend wall created by limiting ethanol to ten percent of gasoline blends.

For those who haven’t followed it, the VEETC blender’s credit financed the build out of ethanol production capacity in advance of the ethanol requirements stipulated in RFSII/EISA 2007. We know what it’s like to have a lot more demand than supply—it happened when a whole raft of states suddenly dumped MTBE and required ethanol to oxygenate their fuel in 2005. Not comfortable for anyone. So, needless to say, it’s a good thing when production capacity is in place to meet growing demand. In addition to all its other benefits, this has allowed ethanol to be very price competitive with gasoline.

Having an export market for the time being will create a place for new production to go, until domestic demand catches up. It also creates breathing room for cellulosic ethanol as it launches its first commercial-scale production plants in the next two years.

But the key fundamental for the biofuels industry to continue working, and to continue growing and replacing more and more of our foreign oil consumption, is the RFSII requirement. Without the floor provided by that legislation, we simply will not see the venture capital come to the marketplace to finance any further ethanol production capacity. Banks need a sure thing, and investors look to the banks’ willingness before they pony up equity.

We need renewable energy to continue growing jobs, to stem the tide of dollars flowing out to foreign oil producers, to enjoy the national and economic security of not being beholden to other countries for something as basic as energy, and we need renewable energy in order to limit greenhouse gas emissions and to reduce the environmental impact of energy production and use. Keeping RFSII in place is fundamental to a positive development in our energy future.



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