Economist: Ethanol industry ‘is in worse shape than we thought’

The ethanol industry’s losses have been more severe than economists originally predicted, an Iowa State University economist said.

And it could be years before fuel demand recovers from losses related to the coronavirus pandemic and other factors that left the U.S. economy in recession, he added.

“The ethanol industry is in worse shape than we thought prior to this pandemic,” said David Swenson, speaking to the Iowa Farmers Union via Zoom on Thursday. 

Ethanol companies have been losing money for more than 18 months, Swenson said, and really only have one path to survival. “Growth will come from exports, period,” Swenson said.

Swenson said the ethanol industry has suffered because higher fuel efficiency standards for vehicles has reduced demand, as have a reduction to travel due to the coronavirus pandemic and other factors. The boom in domestic oil production, which made the United States the world’s largest producers, also hurt markets for ethanol, which was seen as a way to reduce reliance on foreign oil supplies, he added.

Much of the recent political wrangling has been over small oil refineries’ request that the U.S. Environmental Protection Agency grant waivers allowing them to skip the blending of ethanol, which they consider too expensive. That would reduce demand, bringing an outcry from both ethanol interests and Iowa’s congressional delegation. 

Swenson said that is missing the breadth of the industry’s problems.

“The ethanol industry’s problem is bigger than the waivers,” Swenson said.  

Swenson said plants struggle even though the industry is selling dried distillers grains (DDGs), a byproduct of ethanol production, for livestock feed. 

“Even with DDG sales, they are losing money because we have been awash in oil and now the recession has lowered prices,” Swenson said. 

It could be a rough road for a while. Swenson said after the Great Recession, fuel demand took six years to fully recover.

However, Iowa is better positioned that most states because it is the top producer of corn, from which most ethanol is made, Swenson added. That reduces expenses.

Monte Shaw, executive director of the Iowa Renewable Fuels Association, recently said ethanol production was cut in half by April. Demand for gasoline dropped a similar amount, dropping prices.

Shaw said it was the worst drop in ethanol demand he had seen in his 21 years of lobbying for the industry. 

In Iowa, at least 10 of the 43 plants had completely shut down at some point during the COVID-19 pandemic and others had limited production. Travel has picked up some in recent weeks. 

Iowa leads the nation in ethanol production. 

U.S. Sen. Chuck Grassley, R-Iowa, and others have lobbied for stimulus aid for ethanol producers. Most recently, Grassley suggested that ethanol companies should get a share of the $20 billion the U.S. Senate wants to provide Agriculture Secretary Sonny Perdue to meet ag-related needs.