The U.S. corn ethanol industry faces major transportation and logistics headaches as ethanol output quickly accelerates, says Michael Swanson, Wells Fargo agricultural economist.
“The outlook is for lower ethanol prices ahead, because if you want to find a home for another billion gallons of production, you'll have to discount it,” he explains. “The nation's ethanol industry is going through a transition from selling ethanol solely as an oxygenate product that helps reduce air pollution to selling it as both an oxygenate product and as a fuel substitute for petroleum, points out Swanson.
“As of now, the ethanol industry is still making a profit, but visions of $4-4.50 corn don't seem to be as strong as they were six months ago,” Swanson says.
Nationwide, ethanol production is rising dramatically. According to the Renewable Fuels Association, 128 ethanol plants are generating 6.8 billion gallons of ethanol production, and the industry is building another 6.7 billion gallons of capacity with 77 new plants and eight expansions.
“As this industry expands, the market is trying to figure out what the revenue from ethanol will be before settling on a price for corn that won't fluctuate up and down quite as much,” says Swanson. “It will take four or five more years before this occurs, and the variables for that determination include the strength of the dollar, the price of oil, OPEC decisions, weather conditions, exports and the world economy.”
Yet, a comparative disadvantage still exists between the U.S. ethanol industry and the petroleum industry in the cost to transport product to market, points out Swanson. “The most effective way to transport ethanol is by pipeline, but pipelines haven't been built yet for ethanol like they have for petroleum,” he says. “The problem is that most ethanol plants are spread out all over the place and there are very diverse destinations for that ethanol. Economically, no single ethanol plant would justify having its own pipeline. However, 30 or 40 ethanol plants could come online together with a pipeline.”
Without its own pipeline system, ethanol must be shipped by truck, rail and barge, which are all in high demand, says Jerry Fruin, University of Minnesota Extension economist. “The economics have not supported building an ethanol pipeline, but people are talking about it,” says Fruin. “Right now, you can't pipe ethanol mixed with petroleum together because of the corrosive nature of ethanol.”
Currently, ethanol plants have to lease or buy tank cars to ship their product by rail, says Fruin. “These tank cars are booked out 18 months to two years,” he says. “It's an issue of concern. The cost of leasing those cars for one month has probably doubled in the last 18 months.”
A problem second only to moving ethanol is moving distiller's dried grains with solubles (DDGS) - an ethanol co-product fed to livestock - adds Fruin. “Most railroads do not allow ethanol plants to put DDGS in their rail cars, because the DDGS tend to stick in the hopper,” he says, “and sometimes it takes someone with a sledgehammer to beat it out.”
Simple technology can modify existing rail cars to widen the bottom gates and to employ a track hoe that can push DDGS from the top as one solution to the problem with DDGS gumming up inside rail cars, says Ken Eriksen, senior vice president transportation,Informa Economics.
In addition, many people are currently looking into how to build pipelines for ethanol, he adds. “Eventually, pipelines may connect several ethanol facilities to a rail head or river terminal,” says Eriksen. “In the meantime, a lot of tank cars are being built and the backlogs are now coming down.”