Biofuels in the Midwest: Today and Tomorrow

Biofuels have been on a roller coaster ride over the past two decades, driven up initially by the national renewable fuel standard (RFS) program that triggered ethanol's heyday from 2002 to 2010 with growing corn prices and surging farmland values-until 2013, when ethanol growth plateaued. Bio-based diesel hit a peak in 2016 and then it too reached a plateau.

Leslie McGranahan, vice president and director of regional research, kicked off the Chicago Fed's virtual 2021 Agriculture Conference with a summary of those boom years, which were followed by the recent pandemic-related situation of fewer miles driven, "leading to plummeting gasoline and biofuel prices." McGranahan added that while there has been some recovery in usage, "the volatility of fuel prices has ripple effects across many sectors."

The uncertainties of the market, state and national energy policies, and the ongoing Covid-19 pandemic resonate throughout the Seventh District, where many biofuel crops and processing plants are central to the agricultural economy. Add new biofuel technologies, a trend toward electric vehicles (EVs), and a new Administration in Washington, and it's clear that a discussion of biofuels gets complicated.

It's fitting then that featured speaker Scott H. Irwin titled his presentation "The Future of Biofuels … It's Complicated." Irwin, Laurence J. Norton chair of agricultural marketing in the department of agricultural and consumer economics at the University of Illinois, Urbana-Champaign, highlighted a theme that he said doesn't get enough attention when considering the future of biofuels. "And that's really, just simply put, politics, and not economics" drives the future of biofuels, he said.

Based on data on ethanol and biomass-based diesel production, consumption, and costs over that past ten to 15 years, Irwin said, it is clear is that ethanol usage has been stuck because of the E10 blend wall, a federal requirement limiting ethanol to 10% of a gallon of gasoline for most uses. And while the growth rate is more impressive for biomass-based diesel, usage is still only about one-sixth that of ethanol.

The current RFS volumes are due to expire in 2022, and new standards are expected to be introduced by the Environmental Protection Agency (EPA), in coordination with the U.S. Departments of Agriculture and Energy, for 2023 and going forward. But Irwin cautioned that future standards "will inevitably be constrained by court interpretations of the congressional intent for the RFS," and changing the RFS program would require congressional action.

Another topic Irwin stressed was the ongoing transition from traditional FAME (fatty acid methyl ester) biodiesel to renewable diesel. When asked about the implications for corn and soybean farmers as they look at prices in the future because of this demand for the new form of diesel, Irwin suggested that "there's going to be a bullish surprise in terms of price of corn and soybeans" and that renewable diesel will have enormous implications for soybean acreage allocations, both in the U.S. and globally.

He added, "But the net price impact for this renewable diesel boom is somewhat uncertain because if we're starting to grow increasing acreage of soybeans for the oil content, we're going to create a huge surplus of soybean meal. And so, it's very difficult then to figure out the net impact on soybean prices. It's clearly not entirely positive."

Irwin went on to say: "And what it basically means is that potentially, the renewable diesel plants could drive out the FAME biodiesel production by outbidding them for feedstock. That's already beginning to happen. I expect that trend to pick up. Right now, the economics are such that it's really difficult for me to see how most FAME biodiesel plants are even staying in business right now, based on the economics as I follow them."

A reasonable projection is that for every gallon of increased renewable diesel in the future, Irwin said, we'll see at least a half-gallon cannibalization of FAME biodiesel production. "But even that half a gallon increase in feedstock needs is just ginormous," he added.

Pricing pressures on consumers are another important factor. Irwin noted that there are signs that U.S. drivers don't have much tolerance for the added expense from the low-carbon fuel standard- type programs, such as in California. These pressures increase the risk of a political counter reaction to expensive renewable diesel, he said, and may lengthen the timeline for investments in renewable diesel to pay off in market growth.

Speaking to ethanol industry investments was John Campbell, managing director of Ocean Park, headquartered in Los Angeles, which is involved with investing in biofuels and other parts of the agricultural sector. Campbell said ethanol producers have had to look to new revenue streams or higher margin opportunities due to the E10 blend wall. "We have about 17 billion gallons of capacity. And we have a domestic market of about 13 billion gallons. Some of our ethanol is exported, but ethanol producers have been squeezed for several years," Campbell said. "So, what they have done is to invest in things they think will bring them more margin."

In particular, the pandemic has led to a demand for more high-quality alcohols. As a result, several plants have undergone expansions to accommodate high-quality alcohol production, Campbell said. Another area has been in concentrating protein for higher-value markets, especially looking toward aquaculture as a potential end use, he added.

One big initiative has been to reduce carbon index scores (measures of carbon dioxide emitted along the supply chain for a given fuel), again looking toward California and other states with low-carbon fuel standards, Campbell said. Reducing the carbon index of ethanol has been a key driver for investment, he noted, and this includes putting in combined heat and power, energy centers, and also carbon capture and sequestration, both through direct injection at or near the ethanol plant into geological formations. And then, he added, there are the planned pipelines to collect and transport carbon from the fermentation of ethanol for permanent storage at more remote locations or for use in enhanced oil recovery.

In addition, Campbell said, there continue to be expansions that provide on-site low-cost incremental production, mainly through additional fermentation and distillation capacity for ethanol. Still, he added, corn production continues to grow on a yield basis, meaning that there is corn starch available for additional alcohol production, in spite of the vehicle market stuck on the 10% blend. Whether or not the blend wall can be breached, he said, alternative jet fuel, biochemicals, and exports are potential future markets.

Some investment in alternative feedstocks (raw materials) for biofuels, such as pennycress, camelina, and other crops, was noted by Campbell. But getting to commercially viable volumes that can be fermented or crushed will take some time, he said.

Campbell concluded: "When you look at the landscape and you look at agriculture and agricultural economics, I think we probably have to get back to biomass. When you look across the landscape, woody biomass and other forms of biomass are probably the only widely available feedstock across the planet to ramp up additional biofuels."

The next panelist also focused on next generation corn products. Natalie Mason is commercial area lead, Gevo Inc., a renewable chemicals and advanced biofuels company headquartered near Denver. Mason said she has good news for corn producers, who may see their ethanol market dwindling, in that Gevo is focused on producing renewable hydrocarbons from corn.

Mason said demand is increasing for renewable jet fuel, and she expects Gevo to be the first to market, given that their process is similar to that at existing ethanol plants.

Gevo is also commercializing the next generation of advanced bio-based renewable fuels with sustainable aviation fuel, renewable premium gasoline, and renewable natural gas that has the potential to achieve net zero carbon emissions over the lifecycle of the fuel, Mason said. She added that the company aims to be net zero from a production standpoint.

A different view on environmental benefits

Taking an entirely different view of the value of biofuels, especially for the environment, the final panelist Jason Hill, professor, department of bioproducts and biosystems engineering, University of Minnesota, argued that biofuels will not be the solution to climate change and air quality issues. Hill said the success of biofuels is "certainly not based on any environmental benefit that has been realized from this industry or on energy security concerns. Statistics often overstate benefits of biofuels. Whatever the blends of ethanol, emissions are not all that different from gasoline. What counts is how they're produced."

Hill said there is reason to believe that biofuels have increased greenhouse gases rather than decreased them. He explained that's possible because some of the first order effects of biofuel use, such as fuel market rebound effects, haven't been factored into the analysis that the EPA and others have done that look at the net carbon emissions from biofuels.

Regarding air quality impacts, Hill noted that vehicle emissions control technologies are so good now that fuel choice really doesn't matter much. However, he added, "when you look at the emissions in the supply chains of those fuels, the external costs of gasoline end up being about $0.50 a gallon that society bears as a result of poor air quality from biofuels. For corn ethanol it's about double that, about $1."

However, a few, truly advanced biofuels actually fit the criteria for being lower carbon fuels, Hill said. Those tend to be made from biomass produced in systems that mimic natural systems. Removing biomass from diverse plots of land could lead to a low-carbon fuel future, but not in the near term, he concluded.

Debate over acres used for food versus fuel

One of the issues that confronts the biofuel industry is the trade-off between crops used for fuel rather than food. Irwin said one way to think of the food versus fuel question and how it will likely play out is to look at the dynamics of the ethanol boom years from roughly 2004 to 2010, when, for example, U.S. corn acreage rose dramatically, particularly in the Great Plains, taking away from the production of wheat and small grains.

"I think that we could see a similar dynamic as we have a need to expand oilseed crops, in particular soybeans" Irwin said. It could be that wheat and small grains crops get left behind once again, as market prices would dictate the need for additional soybean acres, he added.

Hill noted that the real battle is between electrification and liquid fuels for transportation energy demands. Hill said that, "all this is happening in the broader context of the world demanding more and more food every year, more and more land used for food-50% more over the next few decades as a result of increased population and increased affluence." With growing affluence, people usually eat more animal products, which tend to be more land intensive, he said.

Electrification is where we want to go, Hill said. However, Campbell questioned whether enough research has been done on the life cycle of electric vehicles in order to come to this conclusion.

Where do electric vehicles fit into the biofuels picture?

A discussion of the future of biofuels would not be complete without including electric vehicles (EVs). Irwin said, "the endpoint is clear and obvious" that we'll transition to electric, and, in the long run, agriculture will need to deal with this issue. However, he added, it will take a long time to phase out the current petroleum-based vehicle fleet. Irwin doesn't see a big impact for at least ten to 15 years. "We have a massive fleet of internal combustion engine cars that are going to turn over fairly slowly," he noted. Irwin added that of the approximately 17 million light duty vehicles sold annually in the U.S., currently only about 2% to 3% are EVs, with maybe 1 to 2 million on the road.

Government policies may ramp up EV use, but the key variable is whether drivers globally and in the U.S. are ready to absorb the cost of climate mitigation. "It's not 100% clear that EVs as a technology get us that far in terms of climate mitigation," Irwin said. He concluded: "We're going to do it, but I believe it's going to take a while."

Though all of the speakers at the conference came from different perspectives, they each confirmed that the future of biofuels is indeed complicated and in flux.

The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.