ON TRACK FOR 2017
Ethanol Executives Look Ahead
Industry Outlook Survey
Strategies for Risk Management
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JANUARY 2017 VOLUME 23
VIEW FROM THE HILL
Down the Line
Four ethanol executives share their viewpoints for the year ahead. By Ann Bailey
2016: A Very Bigly Year By Bob Dinneen
Rural America’s Voice By Emily Skor
Solid Base for Optimism
Ethanol industry survey reveals national, local concerns. By Susanne Retka Schill
Making Strides for Ethanol in 2017 By Brian Jennings
Misguided EC Proposal Phases Out Conventional Biofuels By Emmanuel Desplechin
CLEARING THE AIR
Call to Action By David VanderGriend
We're Fine Under Trump By Tom Bryan
A Few Reasonable RIN Ideas By John Campbell
Spot-on Strategies in Risk Management
Differing behavior in ethanol and corn markets creates hedging challenge. By Susanne Retka Schill
Tax Reforms Will Require Attention By Donna Funk
ON THE COVER Poet expects solid year ahead. PHOTO: GREG LATZA
4 | Ethanol Producer Magazine | JANUARY 2017
Ethanol Producer Magazine: (USPS No. 023-974) January 2017, Vol. 23, Issue 1. 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 | JANUARY 2017
We’re Fine Under Trump America’s clean and renewable energy sector is uneasy with Presidentelect Donald Trump, but that anxiety doesn’t permeate through ethanol land. Trump carried eight of America’s top ethanol states—the solid red parts of the Tom Bryan
President & Editor in Chief email@example.com
map—and a significant percentage of ethanol plant employees, executives and board members are Republican, conservative, or both. We don’t need polls to tell us that. Trump won Iowa, ethanol’s epicenter, and he named Gov. Terry Branstad to be ambassador to China. That’s great. Branstad is a longtime ethanol supporter and a statesman the Chinese trust. The governor’s familiarity with biofuels and ag exports will benefit our industry, which depends on China to buy half of the distillers grains we export. Furthermore, there’s reason to believe that Trump’s ambition to retool trade deals, done right, could benefit ethanol and DDGS sales abroad. At press time, Trump had still not identified his cabinet picks for secretaries of agriculture and energy, but he had named Scott Pruitt, Oklahoma’s attorney general, to lead the EPA. Pruitt was clearly not on our list of candidates to run the agency that oversees the renewable fuel standard (RFS). He’s an oil-friendly “climate skeptic” who sued Obama’s EPA regularly in the name of curbing government overreach. If and when Pruitt takes his post (Democrats may try to block him), the troubled Clean Power Plan and the Waters of the U.S. rule will be among his first targets. Other EPA-run programs could be subject to similar beat downs under a Trump/Pruitt EPA, but not the RFS. While Pruitt has been critical of ethanol’s advancement—like when he filed an unheeded RFS complaint with the U.S. Supreme Court a few years ago—he’s unlikely to pick a fight with us now. Trump’s mission to create and preserve jobs, and revive American manufacturing, reads like a virtual ethanol industry narrative. Domestic biofuels production is consistent with Trump’s vision. Plus, the president-elect’s gratitude to Iowan voters is real, and his campaign pledge to “protect corn ethanol” seems honest. Let’s trust it. At the start of the Trump presidency, the U.S. ethanol industry has never been stronger. We are producing more than 1 million barrels of ethanol a day, and we’re about to experience the highest sustained period of volumetric output in biofuels history. If that isn’t enough, the American biofuels industry is in closer agreement with the petroleum industry on biofuels policy than ever before. Today, the nation’s largest integrated oil companies and all major U.S. gasoline retailer groups are unified with us on keeping the RFS working, exactly the way it was designed. We’re going to be just fine under Trump and, in fact, 2017 is going to be an especially good year for ethanol.
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VIEW FROM THE HILL
2016: A Very Bigly Year By Bob Dinneen
The year 2016 was one of growth for the stations offering higher ethanol blends and more U.S. ethanol industry, EPA raised the final 2017 export opportunities opened up overseas. No doubt 2017 will have plenty of challenges and opportunities conventional biofuel target under the renewable for our industry, as well. But before we get there, I always think itâ€™s good fuel standard (RFS) to the statutory 15 billion to prepare ourselves with a healthy dose of self-deprecating humor. So gallons, further expansion came from more with tongue placed firmly in cheek, I present my annual in and out list. OUT
First Spouse Bill
First Lady Melania
Flores 9.7 Percent Ethanol Cap Legislation
States Blending More Than 10 Percent on Average
Presidential Executive Orders
BoatUS Bashing Ethanol
Crappie Masters Boats Using E10
RFA Chairman Emeritus Doyal
RFA Chairman Mick Henderson
EU Antidumping Duty
Bigly Agenda, Bigglier Expectations
Democratic Leader Harry Reid
Democratic Leader Chuck Schumer
Food vs. Fuel
Falling Food Prices
Chinese Trade Barriers
China as a Currency Manipulator
Obscure Regulatory Barriers to E15-E30
Opening the Market to Midlevel Blends
MOVES Model Analyses
EPA FOIA Revelations
RINs Driving Investment
Us Against Them
Valero Joins RFA
2014-â€™16 Unlawful Distribution Waivers
2017 15 Bgy Conventional Biofuel RVO Author: Bob Dinneen President and CEO, Renewable Fuels Association 202-289-3835
8 | Ethanol Producer Magazine | JANUARY 2017
EVENTS CALENDAR 2017 National Ethanol Conference February 20-22, 2017 Hilton San Diego Bayfront San Diego, California The 2017 National Ethanol Conference: Building Partnerships, Growing Markets provides attendees with an exclusive opportunity to engage key decision makers and industry executives while networking and learning about the latest technologies and government policies. 202-315-2466 | www.nationalethanolconference.com
June 19-21, 2017
2017 International Biomass Conference & Expo April 10-12, 2017 Minneapolis Convention Center Minneapolis, Minnesota
Organized by BBI International and produced by Biomass Magazine, this event brings current and future producers of bioenergy and biobased products together with waste generators, energy crop growers, municipal leaders, utility executives, technology providers, equipment manufacturers, project developers, investors and policy makers. It’s a true one-stop shop—the world’s premier educational and networking junction for all biomass industries. 866-746-8385 | www.biomassconference.com
2017 International Fuel Ethanol Workshop & Expo June 19-21, 2017 Minneapolis Convention Center Minneapolis, Minnesota From its inception, the mission of this event has remained constant: The FEW delivers timely presentations with a strong focus on commercialscale ethanol production—from quality control and yield maximization to regulatory compliance and fiscal management. The FEW is also the ethanol industry’s premier forum for unveiling new technologies and research findings. The program extensively covers cellulosic ethanol while remaining committed to optimizing existing grain ethanol operations. 866-746-8385 | www.fuelethanolworkshop.com
2017 National Advanced Biofuels Conference & Expo June 19-21, 2017 Minneapolis Convention Center Minneapolis, Minnesota With a vertically integrated program and audience, the National Advanced Biofuels Conference & Expo is tailored for industry professionals engaged in producing, developing and deploying advanced biofuels, including cellulosic ethanol, biobased platform chemicals, polymers and other renewable molecules that have the potential to meet or exceed the performance of petroleum-derived products. 866-746-8385 | www.advancedbiofuelsconference. com
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JANUARY 2017 | Ethanol Producer Magazine | 9
Rural America’s Voice By Emily Skor
This month as we ring in the new year, we also inaugurate a new president and induct a new Congress. As the country continues to digest the results of our
November elections, one thing is crystal clear—rural America matters. Rural America has a resounding voice. Rural America has expressed a tangible desire to focus on American jobs, American infrastructure and American energy independence. Of course, this industry knows that the agricultural community is and has always been the backbone of the United States. However, the recent election results have put ethanol-producing states firmly at the forefront of the political discourse. While political analysts and policy pundits continue to pontificate on the results of this historic election, we’ll be busy working to make sure that the elected officials make good on their promises to support industries and opportunities that support rural America. Ethanol has long been tied to the success of the agriculture industry and, with this newfound focus on rural communities, it is essential that we work with the new administration to support policies that encourage greater use of ethanol. President-elect Trump and VicePresident-elect Pence publicly stated their support for ethanol and the renewable fuel standard (RFS) and did so repeatedly throughout the campaign. Going forward, it will be critical to work with the incoming administration—the cabinet, political appointees and advisors—to make sure they understand the details of how the RFS succeeds and why it should remain in place. Maintaining a strong RFS is our No. 1 priority. The RFS is our country’s most successful energy policy and it continues to foster competition and consumer choice. Under the Obama administration, the U.S. EPA got the RFS back on track by setting the 2017 renewable volume obligations (RVOs) for conventional biofuels under the RFS to the statutory level of 15 billion gallons. We look forward to working with the new administration to maintain a strong RFS so that ethanol can continue to add octane to the fuel supply while reducing greenhouse
gas emissions, displacing harmful chemicals in gasoline and saving consumers money at the pump. We must also continue to work toward expanding the availability of higher ethanol blends around the country. Securing a 1-pound Reid vapor pressure (RVP) waiver for E15 will be essential in increasing the retail availability of E15. The fuel is already available in more than half of the states in the U.S., and working with Trump’s administration to resolve the RVP issue will encourage even more retailers to carry higher blends. Finally, we will work with the Trump administration to end the debate over the point of obligation under the RFS. The RFS has been law for more than a decade, giving ample time to adjust and comply. As outlined by Congress, refiners are the obligated parties required to blend the volumes of renewable fuels. In just the past two years, we have seen significant expansion of higher blends, like E15, being offered by major retailers such as Sheetz, Thorntons, Racetrac, Minnoco, Kum & Go, Murphy USA and Protec Fuel. This is good news because increasing the availability of clean biofuels as part of our nation’s transportation fuel supply is exactly what the RFS was intended to do. Changing the point of obligation now would remove the incentive for retailers to offer higheroctane, cleaner-burning blends like E15. It also would reward those refiners who have made every effort to avoid blending more biofuels. The EPA’s recent recommendation proposing to deny the petition to change the point of obligation is the correct one. President-elect Trump made firm commitments to the RFS and to the future of biofuels, and as an industry we need to work with his team to ensure that the point of obligation remains unchanged so that America benefits from the continued expansion of E15 and higher ethanol blends. The future of the ethanol industry is bright. With the certainty provided by strong RVOs, and the expanding availability of higher blends like E15, we are in an excellent position to work with the new administration to continue delivering high-performance 21st century fuel for 21st century vehicles for the next year and beyond.
10 | Ethanol Producer Magazine | JANUARY 2017
Author: Emily Skor CEO, Growth Energy 202-545-4000 email@example.com
Making Strides for Ethanol in 2017 By Brian Jennings
The wind is at our backs as we ring in the new year, so let’s capitalize on the progress we have made and continue making strides for ethanol in 2017. We convinced the U.S. EPA to set the final conventional biofuel volume under the renewable fuel standard (RFS) at the statutory level of 15 billion gallons for 2017. While EPA was two years behind schedule, it is notable the agency did not invoke the legally shaky “blend wall” waiver excuse this time. Instead, EPA agreed with our argument that recordhigh gasoline consumption led to increased ethanol use, justifying the move to push volumes to the statutory level. (The American Coalition for Ethanol and other organizations have sued EPA over the misuse of the general waiver authority for the 2014-’16 RFS volumes and we anticipate a decision by the U.S. Court of Appeals for the D.C. Circuit in the next several months.) A record 19.28 billion gallons of renewable fuel will be required this year, which will boost the economy and save consumers money at the pump. Getting the RFS back on track is timely, given Donald Trump is set to be inaugurated as the 45th president of the United States this month. Rural America can and should take credit for the historic election result. Voters in key counties in states such as Iowa, Indiana, Michigan, Minnesota and Wisconsin who voted for Obama in 2008 and 2012 voted, in 2016, for Trump instead of Clinton. These swing voters believe the Obama administration handed down too many regulations and provided rural America with too little economic relief. Trump would be wise to reward rural voters for their support, which means our industry needs to outline specific ways the new administration can help. While this column is being written in advance of Trump announcements about who will advise him on key energy issues at EPA, USDA, the Department of Energy and the White House, it’s our job to capitalize on rural America’s political goodwill and influence the first 100 days of the Trump presidency and the 115th Congress. It is essential we are engaged to help Trump keep his campaign promise to support the RFS and provide regulatory relief to rural America.
12 | Ethanol Producer Magazine | JANUARY 2017
One of the first opportunities you will have to do that is ACE’s D.C. fly-in March 22-23. We plan to meet with the new leadership at EPA and the White House, along with members of Congress, most of whom were not in office when the RFS was signed into law. It is incredibly important for ethanol advocates to be engaged because agriculture wasn’t the only voting block to provide essential support for Trump. Some high-profile people in the oil sector were at his side early on as well, namely fracking entrepreneur Harold Hamm and business mogul Carl Icahn, who is a majority owner of a refiner claiming to be harmed by the price of RINs (renewable identification numbers used to demonstrate compliance) under the RFS. Icahn is personally lobbying Trump to change the RFS pointof-obligation because he believes RIN prices are rigged. Valero and other merchant refiners who are complaining RIN prices are too high have sued EPA for not moving the point-of-obligation. While Trump campaigned in support of the RFS, he also promised regulatory relief to oil companies, so a potential flashpoint will be how the Trump administration balances the interests of rural America and the oil sector. Another priority for us will be working with the new EPA or Congress to provide Reid vapor pressure (RVP) regulatory relief for blends above E10. We have a strong case to make. The RVP limit hurts fuel retailers and forces consumers to pay more at the pump. With Trump promising to erase a host of burdensome regulations, the RVP limit on higher ethanol blends needs to be on his list. Finally, we still have a compelling argument to make for the octane value of ethanol. While it is uncertain whether Trump will maintain the current CAFE-GHG standards, we are well-positioned to help his administration appreciate how high-octane fuel such as E25 or E30 can improve engine efficiency and reduce our dependence on OPEC and foreign sources of oil. The wind is at our backs, let’s keep moving forward. Author: Brian Jennings Executive Vice President American Coalition for Ethanol 605-334-3381 firstname.lastname@example.org
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Misguided EC Proposal Phases Out Conventional Biofuels By Emmanuel Desplechin
The European Commission has just made another frustrating U-turn on biofuel policy. In November, as part
of its proposed revision of the Renewable Energy Directive for 2020’30, the Commission called for phasing out the use of conventional biofuels in Europe from a 7 percent maximum share of road transport energy in 2021 to 3.8 percent in 2030. The proposal isn’t just misguided policy—conventional and advanced biofuels are essential tools for decarbonizing transport in Europe and for meeting EU energy and environmental goals—but it’s also misguided policymaking. The EC has now proposed four fundamental changes to the targets guiding biofuels since the first in 2003—a policy change every three years, creating regulatory instability and an impossible investment environment. The Commission’s proposal jeopardizes the €16 billion ($16.7 billion) investments in biofuel production facilities that were made in good faith and which have helped stabilized price volatility in commodity markets, facilitated millions of tons of EU-grown feedstock purchases each year, and provided valuable income for Europe’s struggling farmers. The proposal threatens to unravel €6.6 billion in annual feedstock revenue for European farmers. The rationale for the Commission’s proposal is questionable. The unscientific, one-size-fits-all approach ignores the fact that feedstock sustainability varies considerably, with conventional ethanol feedstocks on top. The proposal considers ethanol produced from sustainable, low indirect land use change (ILUC) feedstock grown in Europe, such as cereals and beets, on par with imported palm oil biofuel, which has high ILUC risk and is linked to deforestation. Any phase out should be applied only to biofuels with a high ILUC risk. The Commission also ignores the widespread support in Europe for the use of biofuels, attributing its new phase-out proposal to “public concerns.” However, the only EU-wide opinion poll, conducted by Eurobarometer, showed that EU citizens overwhelmingly support the use of biofuels in Europe by more than 70 percent. The food-versus-fuel argument is also misguided. In a 2015 report, the EC confirmed EU biofuels policy has not led to negative impacts on food prices. The UN FAO World Food Price Index shows that global food commodity prices have actually dropped by 15 percent between 2008 and now—a period that witnessed a
14 | Ethanol Producer Magazine | JANUARY 2017
significant ramp up in global biofuels production. Cereals, which make up the by-far largest share of feedstock used to produce European ethanol, have seen global prices fall by a massive 40 percent since 2008. The World Bank has suggested that through biofuel’s displacement of oil, they even may help alleviate food price increases. It’s now up to EU member states and the Parliament to consider the proposal. In climate and energy discussions, European members clearly stated they want flexibility in determining their own future energy mixes. The EC proposal undermines this objective. In 2015, when the EC and parliament adopted the compromise ILUC directive agreement, it introduced a 7 percent cap on conventional biofuels and called for a policy framework that “would promote sustainable biofuels after 2020” and “create a long-term perspective for investment in sustainable biofuels with a low risk of causing indirect land use change.” The EC proposal ignores this call, because many conventional biofuels, particularly European ethanol, achieve high greenhouse gas (GHG) savings and low ILUC risk. Phasing them out will rob member states of a useful tool for meeting EU climate and energy targets. The Commission has confirmed that conventional biofuels have been, and will be by 2030, the main tool for delivering GHG emission reduction in transport. Given the need to achieve 18 to 20 percent reductions in transport to reach Europe’s overall 40 percent decarbonization goal by 2030, the use of conventional biofuels should not be lowered. It is unrealistic for the Commission to expect biofuel investors to now fully invest in advanced biofuels, considering how they’ve been stung so many times by the Commission’s U-turns. The EU can restore biofuel investor confidence and protect existing investments by not lowering the contribution of conventional biofuels from the levels in existing legislation. Policy continuity is vitally important and so is the contribution of conventional biofuels post-2020. The EU targets for emission reduction in transport fundamentally rely upon the GHG savings from these biofuels. Author: Emmanuel Desplechin Director Government Affairs ePure, the European Renewable Ethanol Association email@example.com
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CLEARING THE AIR
Call to Action By Dave VanderGriend
Last November, I flew to India, a country suffering with some of the worst air pollution in the world. You can see smog hanging over cities like a blanket. I was there
because India wants to increase its ethanol blending from E2.5 to E22. I thought about the hurdles it will encounter moving toward that goal, but, I realized if India wants to make it happen, it can be done, as it has in Brazil, Paraguay, Thailand and other countries using the same cars that we drive right here at home. The United States, fortunately, has cleaned up much of its visual smog, but just because we can’t see it doesn’t mean many pollutants aren’t there. So, I started to think, what would it take to get the U.S. back to a leadership position in biofuel blending instead of just being an E10 follower? The simple answer is: to be able to put any ethanol blend into any car, from any pump. Now, I know saying it is much easier than getting it done. But it does take us out of the box everyone tries to put us in and allows us to ask the question, why not? Every regulation, every rule making, every warning sticker is a made-up box that we find ourselves struggling to get out of. The U.S. EPA finally allowing corn ethanol to meet the maximum of 15 billion gallons annually is certainly good news. At the same time, it is somewhat sobering, as this is as good as it will get in terms of what the renewable fuels standard (RFS) can provide as a demand driver. By 2022, when the RFS enters its next phase, the ethanol industry could be at 130 percent of current production, with supply exceeding demand. This could cause RIN and ethanol pricing to decline, if we are trading only in a fixed market. It is no secret I have been ringing the alarm bell that we need to look beyond the RFS. Our blueprint for long-term success requires us to develop a future in which ethanol is given full access to the market and, in so doing, receives its full value for being a quality fuel.
16 | Ethanol Producer Magazine | JANUARY 2017
This is where we may be able to capitalize on the new administration and a new attitude in Washington. Removing the dozens of unnecessary and burdensome regulations that thwart higher blends and infrastructure investment is a message that is well-received. Ethanol’s tried and true benefits of local job creation, agricultural benefits, energy independence, engine performance, low carbon and cleaner air have never been better positioned to flourish in a free market. If you are like me, you want to see a plan to make this happen. I wrote a white paper in 2015 in which I offered a number of specifics. But as Urban Air gets deeper into the issues of ASTM, terminals, retailers, certification fuels, lifecycle analysis, emission testing and fuel studies, our list of unnecessary regulations has grown significantly. Then the question I ask myself is what does a free market look like and how do I know I’m there? I look at our industry groups at the national and state levels and see so much talent. I am committed in 2017 to continue working with each of these groups and call us to action around creating an extensive list of all the roadblocks limiting a free market. We can then prioritize them, split them up according to our talents and eliminate them. I have been in the situation many times, where politicians will ask what they can do for the industry. But I have yet to be able to hand them a comprehensive plan coming from a unified industry on how to get ethanol to a free market. Frankly, get us onto a level playing field, then the government can get out of the way and let us compete. 2017 is the year for the industry to pull together and grow beyond our dependence on D.C. We can take control of our own destiny by truly gaining access to a free market in which the consumer can choose the best fuel. If we are allowed to compete, ethanol will win. Author: David VanderGriend President, Urban Air Initiative, CEO, ICM Inc. DaveV@icminc.com 316-796-0900
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BUSINESS BRIEFS People, Partnerships & Deals
Dennis Bayrock has been appointed adjunct professor in the Department of Animal Science at the University of Minnesota. He also currently serves as global director of Bayrock fermentation research at Phibrochemâ€™s Ethanol Performance Group. At the U of M, Bayrock will collaborate on a number of research projects involving antibiotic use, inactivation kinetics, risk assessment and bacterial contamination mitigation strategies in fuel ethanol production. Growth Energy has appointed Christopher Hogan as vice president of communications and public affairs. In his new role, Hogan will oversee all aspects of the organizationâ€™s efforts to raise awareness of ethanolâ€™s importance as Americaâ€™s leading source of clean, affordable, homegrown energy. Hogan previously served as vice president of communications at the International Bottled Water Association, where he represented the industry in U.S. and international publications and managed award-winning public relations efforts designed to strengthen IBWAâ€™s role as a thought leader at the lo-
cal and national level on industry, environ- ergy Systems Technology Inc. WEST mental, health, safety and consumer issues. provides specialty chemicals and engineering service for water treatment in a variety of Lee Enterprises Consulting has an- industries including commercial & institunounced the addition of five new experts tional facilities, light industry, oil fields, and in its newly formed Renewable Chemicals central heating/cooling plants. Located in Division. The consulting group, which now California and servicing the U.S. Southwest, numbers over 100 experts worldwide, has the company has nearly two decades of exspecialists in biodiesel, ethanol, emerging perience helping customers reduce operattechnologies, biomass power, renewable ing costs related to water and energy usage. chemicals, biogas, anaerobic digestion, business and finance. The new additions include David Dodds, Ronald Newman, Steven Toon, Bernard Cooker and David Senyk. The Renewable Fuels Association Aemetis Inc. has announced the election has announced the addition of KAAPA of Lydia I. Beebe to the companyâ€™s board of Ethanol Ravenna LLC to its membership. directors. Beebe is senior counsel at Wilson On Sept. 30, KAAPA Ethanol Holdings Sonsini Goodrich & Rosati PC. Prior to join- closed on its acquisition of the former Abening Wilson Sonsini, she served for 38 years goa Bioenergy ethanol plant in Ravenna, with Chevron Corp. In 1995, Beebe was Nebraska. The facility uses 33 million bushpromoted to corporate secretary of Chevron, els of corn to produce 90 million gallons of the first female corporate officer in Chevronâ€™s ethanol per year. KAAPA Ethanol Holdings 127-year history. In 2007, she also became owns and operates another facility in MinChevronâ€™s chief governance officer, hold- den, Nebraska, and its latest addition brings ing both offices until she retired in 2015. the companyâ€™s combined ethanol production capacity to 170 MMgy. This is the companyâ€™s U.S. Water, an Allete Co., has an- second producer membership to RFA. nounced the acquisition of Water & En-
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18 | Ethanol Producer Magazine | JANUARY 2017
Houston-based Natural Chem Group LLC recently acquired the mothballed Abengoa ethanol plant in Portales, New Mexico, through a competitive bidding process. NCG plans to redevelop the facility into an eco-fuels blend terminal, capable of producing 4.5 million gallons of B20 biodiesel per month. The company will blend diesel with biodiesel to produce varying blends of commercial transportation fuel, primarily a 20 percent biodiesel blend (B20), which is the industry standard.
ket Corp., Gevoâ€™s distribution partner in the Houston market, is blending the fuel. Buceeâ€™s, a 37-store regional chain, is the first company to sell the blend, which is marketed as a high-performance, ethanol-free gasoline.
Novozymes recently launched Fermax, an enzyme protease that prevents foam development during the sugarcane ethanol fermentation process, while delivering improved control and replacing chemicals. For an average size plant, trialing partners also experienced a cost reducTaurus Energy AB has joined the tion of up to 20 percent when using FerMinnesota Bio-Fuels Association as a max, as compared with use of chemicals. vendor member. Taurus Energy, which Ener-Core Inc. has delivered two of its is based in Sweden and has operations in Minnesota, is a research and develop- 2-MW power oxidizers to the Pacific Ethament company that has developed new nolâ€™s Stockton, California, ethanol plant. The yeast technology for ethanol production. power oxidizers, after delivery and installation with a Dresser-Rand KG2 turbine, are Gevo Inc. announced Alaska Airlines expected to provide up to 3.5 MW of elecfueled a flight using its cellulosic renewable tricity and over 26,000 pounds of steam per alcohol-to-jet (ATJ) fuel Nov. 14. The flight hour. The power stations will provide Pacific originated in Seattle and concluded at Ron- Ethanol with a first-of-its-kind solution that ald Reagan Washington National Airport in can reduce air pollution by converting lowArlington, Virginia. Gevo also announced quality waste gases generated by the Stockton that a 12.5 percent blend of its isobutanol is plant's ethanol production into useful elecnow being sold in the Houston area. Mus- tricity and steam. The power stations are in-
tended to significantly reduce the quantity of energy currently purchased by the Stockton plant and are expected to reduce its energy costs by an estimated $3 to $4 million per year. ICM Inc. has announced it has commenced a process to explore the feasibility of revitalizing the recently purchased Abengoa Bioenergy plant in Colwich, Kansas, to a larger-scale, state-of-the-art energy efficient biorefinery. If the project proceeds, the plant will encompass all of ICMâ€™s latest technology innovations with the goal to have one of the lowest carbon indexes of any grain ethanol plant in the world. This venture would be a showplace that ICMâ€™s global customers could visit. The process for building the plant will require the raising of additional capital, as well as procuring engineering studies and acquiring the necessary permits, licenses and consents to proceed. This assessment process is being undertaken by ICM. SHARE YOUR INDUSTRY NEWS: To be included in the Business Briefs, send information (including photos and logos, if available) to Business Briefs, Ethanol Producer Magazine, 308 Second Ave. N., Suite 304, Grand Forks, ND 58203. You may also email information to firstname.lastname@example.org. Please include your name and telephone number.
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JANUARY 2017 | Ethanol Producer Magazine | 19
Prices & Market Analyses
Natural Gas Report
Natural gas inventories hit record peak Nov. 28—After starting from a baseline of more than 2.4 Tcf in March 2016, many market watchers viewed a record as a foregone conclusion and grew concerned about pushing up against estimated storage capacity above 4.3 Tcf. A tight fundamental market, however, limited the gas available for stockpiling underground and led to a historically low injection season. At most points during the late summer, it looked like the trajectory of weekly storage injections would lead to an end-ofseason peak shy of the 2015 record. As it turned out, mild weather in October and November worked to limit fourth-quarter heating demand for natural gas, freeing up enough volumes to be injected into storage to reach the new record peak ahead of the winter. Natural gas storage inventories exceeded the 2015 record peak of 4,009 Bcf and grew as high as 4,047 Bcf as of Nov. 11. The next week’s report showed a net withdrawal for the week ending Nov. 18, bringing the 2016 injection season to a close. As the market turned its attention to withdrawal season, inventories had potential to be drawn down much faster than the previous year. Expected year-over-year increases in heating load will affect demand from the residential, commercial and industrial sectors throughout the season. In addition, record exports and falling production volumes will
by Andy Huenefeld
further contribute to more robust weekly withdrawals than experienced during the previous year. Given the tightening fundamental balance, inventories will face an uphill battle to refill to a record for a third consecutive year in 2017.
Corn market steady on record yield Nov. 28—Corn production was determined to be 15.226 billion bushels as the national yield was last figured at 175.3 bushels per acre. If realized, this would be a record yield ahead of the 2014-’15 campaign with its yield of 171. With carry-in from the previous crop year of 1.738 billion bushels and imports projected at 50 million bushels, total corn supplies are slightly more than 17 billion bushels. Current demand projections sit at 14.610 billion bushels with feed demand expected to consume 5.650 billion bushels, ethanol 5.30 billion bushels, other industrial demand 1.435 billion bushels and exports at 2.225 billion bushels. This supply versus demand results in a carryout slightly above 2.40 billion bushels. The market seems comfortable as nearby futures have settled in around $3.45 during the past couple of months. A few things helped to support the corn market and may impact values into the winter and early spring. One important factor is the soy complex. Despite a larger soybean crop, the market anticipates continued demand growth for soybeans and soybean products in the global marketplace. Global carryout-to-use ratios in both protein meal and vegetable oils continue to be squeezed tighter by massive demand. Due to the low, flat-price environment in corn, farmer movement has lagged far behind that of soybeans. Low flat price and carries in the corn market will keep producers holding onto bushels until price levels reach desired selling levels. Lack of movement will keep nearby basis levels supported and could be a supportive factor to corn spreads despite a carryout of more than 2 billion bushels.
by Jason Sagebiel
Two things that will impact flat price in the coming months will be South America corn and soy production and the U.S. dollar. The dollar has an indisputable negative correlation with commodity values and will be a key factor in the success of the U.S. export program for both corn and soybeans. The next big fundamental hurdle in our path will be the January World Agriculture Supply and Demand Estimates report, in which we will receive a final production number, allowing traders to place even more focus on demand and new-crop acreage scenarios. Comments in this column are market commentary and are not to be construed as market advice.
20 | Ethanol Producer Magazine | JANUARY 2017
Regional Ethanol Prices ($/gallon) Front Month Futures (AC) $1.616
Warm fall temperatures delay DDGS seasonal demand Nov. 28â€”The winter months are here, but the weather has taken its time catching up. The elongated fall in the Northern Plains delayed cattle placements and demand for wet DDGS. The barge market and container markets held steady, but in late November, prices had not yet made their typical winter march higher. Domestically, it has been an odd year. In the eastern Corn Belt, there are challenges with elevated vomitoxin levels in the corn crop and, in turn, the DDGS. It is not necessarily hindering trade, but it is definitely forcing buyers to be more aware of the DDGS they are buying. In turn, the market is doing a lot of analysis, sometimes with testing kits that are not specific to DDGS,
1.815 SOURCE: DTN
by Sean Broderick
so that even some of those results are creating more questions than answers. The market is making its way to more thorough tests that give more accurate results, such as HPLC, but it remains a work in progress. Internationally, buyers have been cautious about advance purchases in light of good soybean crops in the U.S. and South America. Cheaper soymeal lessens the protein need supplied by DDGS. But with distillers grains at or just above the price of corn in the Gulf and domestically, it stills saves money in rations. The ramifications of the election on trade, in conjunction with a strong dollar, are not yet known, but questions beget opportunities.
Regional Gasoline Prices ($/gallon)
Front Month Futures Price (RBOB) $1.427 Region
1.490 SOURCE: DTN
DDGS Prices ($/ton) Jan. 2017
153 SOURCE: CHS INC.
Corn Futures Prices (March Futures) Date
Nov. 29, 2016
Oct. 31, 2016
Nov. 30, 2015
132.946 SOURCE: FCSTONE
Cash Sorghum ($/bushel)
by Rick Kment
Ethanol prices rally on post-election energy uncertainty Nov. 28â€”The market seemed to be making a delayed shift to seasonal patterns during late October and early November as energy and ethanol prices started to turn lower based on growing supplies. However, that quickly changed into long-term market uncertainty after the November election. Beginning in the second week of November, crude oil futures rallied over $4 per barrel, while RBOB gasoline futures prices regained strong market support. That pushed frontmonth December RBOB gasoline futures back above $1.40 per gallon after a 12-cent rally in the last two weeks of November. Ethanol futures also saw aggressive market support as traders remained concerned about long-term supply issues and how any trade restrictions would affect energy markets over
the near and distant future. At the end of November, the ethanol market was keeping pace with the moves in RBOB gasoline markets as traders continued to focus on additional strong buying patterns. Even though seasonal market pressure continued to keep prices low in both ethanol and gasoline markets through the winter and early spring months, concern was starting to develop about the potential for higher prices through the summer of 2017. If prices continue to move higher and limit driving activity, that could negatively affect consumer demand. Ethanol futures prices were trading above $1.60 per gallon in front-month contracts, which had not limited demand at that point. But further uncertainty in gasoline markets may spark demand pressure.
Nov. 28, 2016
Oct. 21, 2016
Nov. 20, 2015
SOURCE: SORGHUM SYNERGIES
Natural Gas Prices ($/MMBtu) Nov. 28, 2016
Oct. 24, 2016
Nov. 28, 2015
SOURCE: U.S. ENERGY SERVICES INC.
U.S. Ethanol Production (1,000 barrels) Per Day
SOURCE: U.S. ENERGY INFORMATION ADMINISTRATION
JANUARY 2017 | Ethanol Producer Magazine | 21
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DISTILLED Ethanol News & Trends
EPA proposes to deny RFS point of obligation change On Nov. 10, the U.S. EPA proposed to deny several petitions requesting the agency redefine the point of obligation under the renewable fuel standard (RFS). A 60-day public comment period on the decision is scheduled to close Jan. 23. Valero Energy Corp. and American Fuel & Petrochemical Manufacturers are among the organizations that have petitioned the EPA to redefine obligated party under the RFS. In its proposed denial of the petitions, the EPA said it believes the current structure of the RFS program is working to incentivize the production, distribution and use of renewable transportation fuels in the U.S. In addition, the agency said it does not believe that the petitioners have demonstrated that changing the point of obligation is likely to result in the increased use of renewable fuel and noted the change would not address the two primary issues inhibiting the supply of renewable fuels, specifically the challenges associated with the commercialization of cellulosic technologies and marketplace dynamics inhibiting the greater use of higher-level ethanol blends.
RFS volume requirements (million gallons) 2017
Volume (billion gallons)
Volume (billion gallons)
Renewable fuel SOURCE: U.S. EPA
EPA releases 2017 RFS RVOs On Nov. 23, the U.S. EPA released its final rule to set 2017 renewable volume obligations (RVOs) under the renewable fuel standard, along with 2018 RVOs for biomass-based diesel. The RVO for conventional fuel has been increased to meet the 15 billion gallon congressional target for conventional fuels. Overall renewable fuel volumes grow by 1.2 billion gallons from 2016 to 2017, a 6 percent increas. Within the final rule, the EPA addressed its past use of the general waiver
authority to reduce RVO volumes below statutory requirements due to infrastructure concerns. The EPA notes that it again proposed to use the general waiver authority in this way for the 2017 RVO for total renewable fuel, but has since determined it was not necessary to use the general waiver authority in the final rule. Rather, the agency said the “use of the cellulosic waiver authority alone will be sufficient to yield a volume requirement that is consistent with available supply.”
Your plant is unique. Your treatment options should be too. WestAgro releases DeLasan CMT TM a patent pending process treatment for corn mash used for fermentationat at fuel and beverage ethanol plants. DeLasan CMT is a leading technology that is best suited for control of organic acids in your fermentation process. The unigue product formulation, low cost, high concentration of actives, and patent pending application make DeLasan CMT unique among other fermentation treatments. Additional benefits of our DeLasan CMT program can include: • Cost reduction in your organic acid control program • Does not contribute inorganic salts • Breaks down easily into food ingredients • Improves your ethanol production • No pre-mixing required • Recognized as safe for grains • Meets the new FSMA requirements • Eliminates your need for anti-biotics
Contact your West Agro representative for more 24 | Ethanol Producer Magazine | JANUARY 2017
EPA approves efficient producer pathway for Redfield Energy
Net RIN generation, Jan.-Sept. 2016 (in millions) D3
The U.S. EPA has approved an efficient producer pathway petition for South Dakota-based Redfield Energy LLC, bringing the total number of plants to receive pathway approvals under the efficient producer program to approximately 63. Plants that have approved efficient producer pathways are able to generate renewable identification numbers (RINs) for production volumes above those grandfathered under current renewable fuel standard (RFS) regulations. To qualify for compliance with the RFS program, any new production above the grandfathered gallons must meet a 20 percent greenhouse gas reduction threshold when compared to the programâ€™s gasoline baseline. According to the EPA, Redfield Energyâ€™s process achieves a 23.9 percent GHG reduction when compared to baseline gasoline. A typical natural gas-fired dry mill ethanol plant that produces 100 percent distillers dried grains achieves a 16.8 percent reduction.
125.17 Renewable CNG
SOURCE: U.S. EPA
EPA publishes RIN data for first three quarters of 2016 The U.S. EPA has released renewable identification number (RIN) generation data for September, announcing 1.67 billion RINs were generated during the month, bringing the net total for the first three quarters of the year to 14.26 billion. More than 17.44 million D3 cellulosic RINs were generated in September, bringing the net total for the first nine months of the year to 125.17 million, including more than 2.84 million generated for ethanol, 73.79 mil-
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lion for renewable compressed natural gas and 50.37 million for renewable liquefied natural gas. Also during the first three quarters of the year, a net total of 204,442 D7 cellulosic diesel RINs were generated, along with 79.14 million D5 advanced biofuels RINs, including 54.54 million for ethanol; 11.31 billion D6 renewable fuel RINs, including 11.00 billion for ethanol; and 2.75 billion D4 biomass-based diesel RINs.
JANUARY 2017 | Ethanol Producer Magazine | 25
2017 Industry Outlook
The ethanol industry is on solid footing as it looks at the year ahead. Ethanol Producer Magazine speaks to four executives about the bright spots, challenges and significant changes in the world of ethanol. By Ann Bailey
Mick Henderson General manager, Commonwealth Agri-Energy. Commonwealth Agri-Energy, a 35 MMgy plant in Hopkinsville, Kentucky, is owned by the 2,300 members of the Hopkinsville Elevator Co-op.
On bright spots for the ethanol industry:
We have an industry that can grow. Whether it’s from corn-starch or cellulosic feedstock, we have opportunities and a market that needs our fuel. It may be incremental growth with regulatory limits or it could just explode, and that would be a good explosion. We all are ready to do big things. The corn supply absolutely has been increasing. We’ve had huge corn crops the past three to four years and, although we’re PHOTO: GREG LATZA
always at risk for the next drought, with big corn crops comes cheap corn that needs new markets. We can provide that market. The other big opportunity, of course, is exports. The U.S. has found a wonderful synergy with 10 percent ethanol in all automotive gasoline. The world needs that same high-octane, clean-burning fuel component and it’s learning that. Our exports have been growing every year, and I think that’s going to continue. World trade is going to be key to our opportunities.
On cellulosic ethanol and new technology:
We’re on the edge of our seats. We all are recognizing the technology is closer and plants have been built. But are those plants cash flowing? The stalking horse bid from Shell for the Abengoa plant in Kansas was something like 5 cents on the dollar. That is a hemorrhage. We all watch Abengoa suffer and it sets us all back. But then there’s the Quad County technology model. We as corn-starch ethanol plants can see a bolt-on
technology that’s not a factor of $4 or $8 capital cost per gallon produced, but a fraction of that where you can increase capacity by 5 percent or 10 percent from the cellulosic fraction in the corn kernel fiber. We all recognize a good opportunity and we’re all looking at technology tweaking to get us there. However, it’s not going to be “Oh, my gosh, we’ve got to spend half a billion dollars to build a plant.” We’re not going to do that. But we can all see spending 20 percent of our capital on a bolt-on technology. When the government promises you a cellulosic RIN [renewable identification number] that’s an extra dollar or whatever, that sounds good, but is it real? My conservative farmer ownership doesn’t want to invest in projects with government-controlled product prices. They want [investments] to be compatible, comparable to do what they
do with nongovernment regulated products. The price for cellulosic ethanol has to come down some, but it’s close. It’s really close. There are technologies and enzymes and yeast and processing equipment that are real, that people are actually installing and trying. The old storyline for me was “15 years ago cellulosic is five years away and 15 years later, it’s still five years away.” I don’t think it’s five years away now. I think the technology is being implemented right now.
On significant changes:
The wonderful part is diversification. When I was in the business 20 to 30 years ago, ADM, where I worked at the time, saw the industry being 10 big plants. All the size of ADM plants, they would absorb all of the necessary production increases needed
to supply 10 percent of the gasoline market as ethanol. Instead, 200 plants were built more like the size of mine. Not the huge plants from multinational corporations, but farmers building co-ops and plants out in a corn field. That was a wonderful opportunity for me, personally, and for farmers, in general. The industry has grown that way—organically. But the consolidation of the industry that you’ve seen in the past 10 years with multiple plant businesses and oil company-owned multiplant businesses, is a little disconcerting. The farmer-owned business model has to compete with that now, but then it always has. The first risky ventures were the smaller plants, farmerowned cooperatives, but it’s still an industry that is diverse in the types of businesses and the ownerships and sizes. A small plant like ours still can compete.
President, The Andersons Ethanol Group. The ethanol group at The Andersons Inc. is one of five business units of the publicly traded company headquartered in Ohio. Its four plants have a combined capacity of 330 MMgy, with an expansion underway at the Albion, Michigan, facility from 55 MMgy to 110 MMgy. The Michigan plant and the company’s 55 MMgy Denison, Iowa, plant are adjacent to commercial grain elevators. The other two plants each have capacities of 110 MMgy: The Andersons Clymers Ethanol, Logansport, Indiana, and The Andersons Marathon Ethanol in Greenville, Ohio.
On bright spots for the industry:
There are quite a few. We have been involved in this business for 10 years now and we’ve learned much about gaining efficiencies in the business. It never ceases to amaze me that we think we’ve leaped a major hurdle, whether it’s in terms of better
efficiencies in production, yields per bushel of corn we process or higher values for coproducts, and more improvements just keep coming. There’s no shortage of vendors out there who are doing research and development for us. They continue to bring us to the next level with new bells and whistles. We’re committed to producing fuel ethanol,
Some chemical companies focus on this
but there are multiple other uses for these plants to produce other products and coproducts to enhance our ability to show returns to our investors on a long-term basis.
On challenges ahead:
An ongoing challenge is the industry has grown so quickly that we have the ca-
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28 | Ethanol Producer Magazine | JANUARY 2017
tailoring chemistries to boost production and increase profitability — from evaporator efficiency to corn oil recovery to water treatment issues. To find out more or to schedule a system audit, contact your Buckman representative or email email@example.com.
pacity to produce more fuel ethanol than we can blend domestically at 10 percent. We are finding other ways to get around that like increasing exports and pushing for infrastructure build-out. That will give consumers a choice at the pump, allowing us to blend beyond that 10 percent “wall” with the help of the RFS. The renewable fuels standard is obviously very important to us, but ethanol demand would not go away without it. However, the infrastructure development to level the playing field would likely slow down. At the end of this month (November), we expect to see the renewable volume obligations for 2017 and, frankly, they’re getting up near the maximum mandate for corn-starch ethanol. The proposed rule was 14.8 billion gallons. We think the industry has made a very good argument that it should go to the mandated amount, not waiving it to 14.8, but going right to 15 billion gallons. If I were going to predict today (Nov. 17), I would guess that is where the RVO is going to come out for
a couple reasons. One of them is that we have surpassed the blend wall. For the past couple months, we’ve had weekly data that shows we’re blending beyond 10 percent at 10.3 to 10.4 percent of all gasoline sold. We are continuing to add blender pumps to sell E15 and E85 blends that allow us to get past the blend wall. Gasoline demand is stronger than it has been the past couple years and blending 15 billion gallons of corn ethanol really shouldn’t be any issue in coming years. On top of that, we have a significant RIN carryover. It’s arguably between 1.5 and 2 billion RINS carried over. Even if the industry should not quite be able to blend 15 billion gallons in 2017, there should be plenty of RIN inventory out there for refiners to buy RINS to cover their obligations that way.
On cellulosic ethanol and new technology:
We’re seeing very slow progress in terms of advanced ethanol. Let’s talk about
cellulosic for a minute. Multiple plants have been on the horizon. Mass production of cellulosic ethanol has been five years away for about 25 years now and I expect that to continue. The problem with expecting a quicker uptake of cellulosic technology is that it will never be price competitive without subsidies and produce ethanol on an even scale with a feedstock that is as efficient as corn is. With corn, we just change starch to sugar and ferment it into alcohol. There are multiple steps in cellulosic and the cost to producing cellulosic ethanol, including the significant capital costs up front, is something on the multiple of four or five times of using a corn feedstock. It’s going to have to forever be subsidized, which I would hate to see, or it’s going to have a very difficult time standing on its own two feet. I think there have been six to eight different cellulosic projects that have had grand openings, but I don’t think any of them are running near their advertised
nameplate capacity. Finding the additional capital it will take to get cellulosic ethanol caught up to anywhere near where corn ethanol is has been is a tough row to hoe. The RFS also allows waivers for cellulosic so they won’t require cellulosic ethanol to be used that isn’t being produced. The way they determine the waiver on that mandated quantity is they do their best to poll the industry about what they expect to be able to produce in the following calendar year and make the mandate something that is reason-
ably close to expectations so as not to force the industry to buy RINS on a product that doesn’t exist. This practice isn’t forcing a higher RIN value that would further encourage a deeper investment in cellulosic technology.
This year I think we will finish close to a billion gallons. South American production is down due to high sugar prices, so we kind of have the ethanol export business to ourselves,
including Brazil as a customer. Between now and seven or eight years out, I expect the potential for ethanol exports to get up near 1.5 to 1.6 billion gallons per year. As I mentioned earlier, I think we are breaking through the blend wall and I expect that to continue. In 2017, we will break through it on an annual average and I expect by the time we get out to 2021, 2022, we could have as much as 2 billion gallons of additional demand for ethanol, just due to higher blends such as E15, E30 or E85.
Senior Vice President and General Manager, Poet Plant Management. Headquartered in Sioux Falls, South Dakota, Poet LLC manages 27 corn-ethanol plants in seven states with a combined capacity of 1.7 billion gallons, plus the Poet-DSM cellulosic ethanol facility at Emmetsburg, Iowa. With the exception of its wholly owned research facility at Scotland, South Dakota, the Poet network of corn-ethanol plants each have a large number of local investors. Poet provides turnkey development, design, engineering, construction, management and marketing for its network of plants.
On challenges facing the industry:
I think we would be naïve to think the oil industry is not going to continue to try and limit the access the consumer has to biofuels by limiting infrastructure expansion and by attacking the renewable fuels standard in Washington D.C. That’s a challenge that remains, and we’re confident that is going to continue in the future. The good news is our product does good things in terms of price at the pump, in terms of performance in the fuel supply. At the end of the day, we think that’s going to win out. The consumers are savvy enough that they’re going to access those benefits, so we’re focused on trying to do what we can do to support the renewable fuels standard in Washington and also to help build that infrastructure, help facilitate that.
30 | Ethanol Producer Magazine | JANUARY 2017
On cellulosic ethanol and new technology:
There’s no question we’re closer (with cellulosic). Poet’s large project where we are commercializing cellulosic ethanol —Project Liberty in Emmetsburg, Iowa—presented challenges. Any development of new, revolutionary technology always does, but we’re continuing to work through those technical challenges. We’re at a point now where we’re getting an operational plant that’s going to be producing in 2017. We’re excited about the gallons we think we’ll be producing there and the fact that we’re proving out. It is a very real, very vital commercial operation that’s got a strong future.
On significant changes:
It’s really about continuous improvement. The plants continue to get better:
more productive, more efficient, less energy consumption while producing ethanol. We see that continuing with new products being developed, new technologies. The industry is still firmly in the growth stage of its life cycle. There’s a lot of opportunity, a lot of upside for us, which will, again, translate into the price for ethanol and the number of products we’re able to deliver. There’s challenges, there’s work. When you think about biofuels, there are a lot of different products out there. There’s a tremendous corn crop out there—too much corn, once again. Our farmers and agriculture are going to be faced with a potential crisis if we don’t do something. Ultimately, what that is, is they’ve got to have more of the corn going into fuels, to provide an option for consumption of corn that they continue to produce. It’s a very bright future. We’re firmly committed to it.
Solid Base for Optimism By Susanne Retka Schill
A November survey of ethanol producers reveals a solid base of optimism in the ethanol industry, along with the need to continue working on important issues. When asked about their outlook, respondents expressed a stronger outlook for the year ahead than the next three years. That may be an indication that people see the cyclical nature of ethanol-as-a-commodity being in its favor for the next year, knowing it may be due for a downturn in the next couple of years. It may also indicate more comfort with the near term and more uncertainty when considering the outlook ahead. When it comes to support for ethanol and the renewable fuels standard (RFS), the debate on the national level registers the greatest concern. But perhaps what is more important to note is that while local and regional support is less concerning, nearly a third of respondents are concerned that there isn't enough support for ethanol at their back doors, both locally and at the Your outlook on the industry state or regional level. This raises the question whether individual plants and their Bad 1% Bad 2% state organizations need to assess the situation at home. Fair 11% Fair 11% Another question asked the respondents about the availability of higher blends. About 70 percent of respondents report E15 and higher blends are offered in one or multiple locations near them. E85 availability is nearly as good, with 67 percent reporting E85-only is offered at one or many locations. AnOK 41% OK 30% other indicator, of course, is how widespread ethanol-free gasoline still is, and 48 percent of respondents report ethanol-free gas is available at one or more locations around them. Looking at it from the other angle, more than 30 percent of ethanol producers don’t have higher blends of ethanol near them—a sign Good 37% Good 43% that there’s work to be done. With the heightened focus on climate change in the public discourse, we also asked how important policy aimed at slowing carbon change is to the future Great 9% Great 14% of American ethanol production. There are those in the ethanol industry who (next 3 years)? (next 12 months)? see it as very or somewhat unimportant, about 18 percent. But a strong majority see a connection between the industry and carbon reduction, with 59 percent saying it is highly or very important. There is an ongoing battle over the RFS, with critics trying to kill it and the industry rallying In open-ended questions, ethanol producers were to defend it. Please rank your level of concern about the impact these discussions are having on support for the industry at the local, state and national levels. asked about their top three concerns. Support for the RFS and the challenge of meeting ever-tightening regulations were frequently mentioned. Not far behind were concerns over workforce training, retention and the challenge of at19% 19% 32% tracting new employees in the face of an aging workforce. Least concerned 29% When it comes to plant-level concerns, yield improve52% Somewhat concerned ments for ethanol rises to the top, along with the range of 38% Most concerned challenges every plant faces, from maintaining an aging facility, to implementing new technology, to building markets 52% 30% 29% or reducing greenhouse gas emissions and carbon intensity. Ethanol Producer Magazine invited its list of producLocal/Community Support State/Regional Support National Support ers to participate in the survey, with a 14 percent response rate, which is considered a standard survey Are E15 and higher blends Is E85 offered near your Is ethanol-free gas offered response level, with a confidence level of 95 offered near your facility? facility? near your facility? percent and a margin of error of plus or minus 80% 60% 80% 5.5 percent. While not a scientifically designed 70% survey (responses were voluntary and not ran- 70% 50% dom), demographic questions indicate it was a 60% 60% 40% representative sample, reflecting the industry’s 50% 50% 39% distribution across states, capacity sizes and a 44% 40% 30% 40% range of job descriptions. 39% Author: Susanne Retka Schill Managing Editor, Ethanol Producer Magazine firstname.lastname@example.org 701-738-4922
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JANUARY 2017 | Ethanol Producer Magazine | 31
CEO, Conestoga Energy Partners. Conestoga Energy Partners operates three plants: 110 MMgy Arkalon Ethanol in Liberal, Kansas; 55 MMgy Bonanza BioEnergy in Garden City, Kansas, and 40 MMgy Diamond Ethanol in Levelland, Texas.
On bright spots in the ethanol industry:
We have a brisk export program and I think that is helping to get rid of some of the surplus alcohol. I think, No. 2, we have reasonably low gas prices encouraging people to drive more, so that’s positive for us. Third, we’ve had a good corn crop, and in our area, good corn and sorghum crops that have given us ample feedstock. Those would be the biggest reasons for optimism.
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We’ve got good demand, or what appears to be, good, solid demand and we’ve got reasonably cheap feedstock. I certainly see it being the case going through second quarter. I don’t know what next year will bring, but beyond the first two quarters of 2017 you get into “Did the new-crop get into the ground okay?” and all those other issues. It appears as though, through things like the Prime the Pump, this industry is not sitting back and waiting for the government to do
everything. We’re doing things ourselves to drive demand of higher blends of ethanol at major convenience stores.
On exports the year ahead:
Assuming that oil doesn’t fall out of bed, I look for exports to continue to grow over a billion gallons or higher, maybe 1.2 billion. It looks like every year we add new customers. China bought ethanol from us this year. India is ready to buy ethanol from us. The traditional market in Brazil, with world sugar prices high like they are, continues to be a destination for us. I am optimistic about exports as we continue to add new destinations.
On significant changes:
The No. 1 change has been growth in demand for our product, because it was easy to see that we were growing faster than there was demand for it. I think that’s one good thing. I think exports of our product have been another good thing. The American farmer has risen to the challenge and the old argument that once was used that it was food versus fuel has proven to be a huge fallacy. The American farmer can produce enough for us to be able to produce both and I think more people see that. More see through the mistruths that were put out there 10 years ago. There’s no doubt technology has gotten more efficient so we’re able to create more ethanol out of the same amount of feedstock. We’re able to do with less power, less energy all together, so we’re probably a little easier on the environment now than what we had been doing. Author: Ann Bailey Associate Editor, Ethanol Producer Magazine firstname.lastname@example.org 701-738-4976 Note: the interviews have been edited for length and clarity.
32 | Ethanol Producer Magazine | JANUARY 2017
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BMP ADVISORS: Steve Squibb, left, Fred Gould, both with Christiansons, and Chip Whalen, CIH, covered best practices in risk management at the Christianson Biofuels Finance Conference in Minneapolis this fall. PHOTO: TIM PORTZ, BBI INTERNATIONAL
SPOT-ON STRATEGIES in Risk Management Protecting ethanol plant margins is complex due to the corn and ethanol marketsâ€™ divergent behaviors. By Susanne Retka Schill
34 | Ethanol Producer Magazine | JANUARY 2017
RISK MANAGEMENT Developing risk management strategies has been a challenge for ethanol producers in the past decade because ethanol and corn markets operate very differently. The corn market is liquid
and futures prices gradually increase in the forward months, while ethanol futures are far from liquid and forward prices tend to be lower than the spot, creating a disincentive to forward price. That is primarily because ethanol storage is limited, with only about 18 days of inventory on hand to accommodate nearby demand. On the corn side, there’s ample storage, which typically creates a cost of carry or positive return to storage. Add to that a seasonality in ethanol plant margins, where the first quarter tends to be a difficult period, which would encourage hedging, while most often, the rest of the year sees better margins on the spot markets, although not always. “The industry has been programmed not to do anything forward as far as contracting beyond the spot period,” says Chip Whalen, vice president of education and research at CIH Associates LLC. “Because what they’ve become accustomed to believe, although not necessarily accurate, is that it is best for the plant to simply stay open and realize margins on a spot basis.” “Most everybody is a hedger today, especially in corn,” says Craig Ludtke, president, Commodity Marketing Co. On the ethanol side, he says not many are using board futures, but Platts and other markets are deep and have useful pricing tools. “Today when doing risk management, you’re doing something with ethanol pricing and corn in equal and proportional amounts so you have a crush margin on, rather than a singular commodity risk position.” Working as a business analyst for Christianson CPA, Fred Gould says what many plants end up doing is protecting cash corn purchases by hedging and using other methods for product sales. “When they buy grain from a producer at a particular price,
that locks in the price, but they don’t have the ethanol locked. So what their hedging is doing is putting themselves back in the market so both sides are floating. Most of the ethanol contracts are indexed, floating with the market.” The contracts, often indexed to Platts or OPIS settlements, result in a monthly average ethanol price.
Developing a plant-specific margin history is the first step in developing a risk management strategy, says Whalen. A history can show, for example, that in February a 7-cent margin was seen 80 percent of
the time over the past five years, indicating a good opportunity to lock in a projected 7-cent margin in a period that often is negative. “But the problem is, the highest that margin’s been for that period in the past five years is 35 cents,” he says. “If I lock it in at 7 cents and the margin improves to 37 cents, I’m potentially leaving 30 cents on the table. So the question is, is 7 cents worth protecting so I at least break even or make a little bit of money? This is because at the other extreme, the low over the past five years for that same period is a loss of 28 cents.” Using put or call options to hedge provides flexibility, Whalen says. During
JANUARY 2017 | Ethanol Producer Magazine | 35
RISK MANAGEMENT harvest, for example, corn prices are usually depressed and, lacking storage, the plant may want to protect the lower price for several months out. One strategy is to purchase a futures contract that locks in the price. A second is to buy call options that set a ceiling on the price. If the corn market goes up, the right to buy the corn at the lower price is protected. If the market goes down, the plant can pay a fee and forego the option and buy the corn at the lower price.
Another strategy is to lock in the corn price, Whalen says, but stay flexible on the ethanol by purchasing a put option that puts a floor under the ethanol sale price. The challenge is to weigh the risk protection against the possibility of improved margins, incorporating the comparative costs of using options versus futures contracts. â€œI think thereâ€™s been more willingness to look at those strategies and looking at flexible options to protect margins
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without necessarily committing to a specific price level,â€? Whalen says. â€œSo a producer can say, in a worst case scenario, Iâ€™m at least going to make money through a period that historically has been difficult for profitability. But not give up my upside or ability to participate in really strong margins if things continue to improve.â€? Ludtke affirms plants use variable hedging strategies. â€œNo one does 100 percent. I would say they hedge varying degrees, from 25 to 65 percent for specific months. Plants have different cash flows. Some are tight, so they have more hedgingâ€”more protection is probably appropriate. Most, once you get to spring or summer are pretty wide open on the spot market.â€? Ludtke adds it is also important to look at gross margins, and not just at the plant level. â€œIn order to work through the noise of the margin, you have to really look at what the industry sees. Itâ€™s the industry margin that is trying to incent plants to slow down or speed up. If you donâ€™t have a good predictive model of what the industry looks like, then these decisions get difficult. Some people are operating with a positive margin in certain time frames while others are negative, because their variable and fixed expenses are higher or their ethanol yields are poorer. In other words, thereâ€™s a lot of moving factors.â€?
Whalen spoke about risk management at the Christianson Biofuels Finance Conference in October, along with Gould and Steve Squibb from Christianson. Gould stresses communication is paramount. â€œA trader and accountant think very differently,â€? he says. â€œThe terms are different. Even the same term is used differently at different companies.â€? For example, DPRâ€”daily position recordâ€”is a common acronym that has multiple meanings when getting into the details. He acknowledges thereâ€™s a hesitancy among accountants and others involved in overseeing risk management to admit not understanding, but he suggests being inquisitive. â€œI find unless you boil it down to the common language, thereâ€™s so
RISK MANAGEMENT much that can be left for interpretation and guessing. And [the trader] will say, that’s not what I meant at all.” Gould recommends accounting teams work with the risk management team to prepare useful reports for management. Generally accepted accounting procedures (GAAP), for instance, call for unrealized gains and losses on open hedges to be reported on the income statement. Gould recommends adding another report that moves the unrealized hedges to the balance sheet, making it easier to evaluate the income statement. The GAAP report, he says, “has to be presented for the banks and financials, but more importantly, we need to evaluate how we’re doing. I call that business intelligence.” It isn’t widely done, he says, adding he gets a lot of questions. “Board members will say, ‘I don’t get this, why are things gyrating up and down so much?’”
Risk management must be approached in a thoughtful way, with best management practices, says Steve Squibbs, business development and solutions analyst at Christianson. That includes things like separation of duties, cash management and documentation. It’s also important that the key information gets to the people needing it. “I’ve seen it happen over the years,” Squibb says. “All the data is being collected but it never goes anywhere. Trading doesn’t flow it to accounting, or accounting is producing all this information but isn’t distributing or isn’t explaining it well enough when distributing.” It’s important to work at continuous improvement, Squibb says, paying attention to failure points in the information exchange. “How do you make sure everybody in the plant that needs to be on top of it gets the information in a timely manner? That’s not just the traders, but senior management and accounting.” Whalen recommends plants create a margin management committee that has a plan spelling out specific commodities, how much to hedge and how far out, along with
who is responsible for what. “We first saw this at a Fortune 500 food company—a roadmap or guideline to spell out specifically what was trying to be accomplished through the risk management plan and how it was going to be executed.” “What people have learned in the industry is that even though, historically, the spot margin has tended to be strong, it isn’t always that way,” Whalen says. “And when it’s not, it can really work against you and be very negative. In that sense, it’s prob-
ably worth exploring other alternatives— forward contracting and protecting margins in advance. I definitely see the industry is more open to doing that now. Not only that, but eager to learn about it as well.” Author: Susanne Retka Schill Managing Editor, Ethanol Producer Magazine email@example.com 701-738-4922
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JANUARY 2017 | Ethanol Producer Magazine | 37
A Few Reasonable RIN Ideas By John Campbell
“While the petroleum industry the RIN from the physical gallon. While this is The significance of this is that the market does not a plan currently endorsed by ethanol pro- not know which renewable fuel bucket refiners remains divided over the question ducers, it's a plan they might want to consider. will fill with which RINs. For example, compliance data for 2014 is not yet available This of moving the point of obligation means that the market can only guess about RINs: Your Ticket to Ride for compliance with the RenewTo get a handle on these issues that go the supply and demand for RINs and that able Fuels Standard (RFS) from round and round like a carousel, it is helpful there is a long time to trade RINs before comunderstand why we have RINs in the first pliance deadlines. This often leads to speculapetroleum refiners and import- to place. When Congress created the first RFS tive trading. ers to blenders, the U.S. EPA has in 2005, some feared there could be logistical made it’s reluctance to change the issues if the government required that every Transparency: Blindfolded gallon be blended with a specific percentage the Music Stops program crystal clear. The agency’s of biofuel. Others feared that crop variables Until The market knows within about 30 days strongly-worded November proposal to deny all point-of-obligation changes, however, only temporarily quiets the program’s critics, who are bound to revive the debate. Small refiners who do not have downstream assets argue that they are being held up by big refiners who have blending and retail assets. Some independent refiners who generate their own renewable identification numbers (RINs) through ownership of biofuel plants have expressed support for moving the point of obligation. Large refiners have said “no.” Due to the vast difference of opinion within the petroleum industry, it is highly unlikely that the U.S. EPA will make a change. In its petition denial, the agency said altering the program could make the system more complex, cause marketplace confusion, and deter investment. But that does not mean the problem of some refiners being forced to buy high-priced RINS will go away. Although it might reduce undesirable trading practices, moving the point of obligation would not change RIN supply and demand fundamentals. There may be a better way to improve the ride: EPA should reconsider allowing biofuel producers to separate
might lead to a shortfall of corn and cause a squeeze. So, legislators and regulators came up with safeguards and off-ramps for the EPA administrator to use if needed. One of these safeguards was the creation of credits, now known as RINs. The RINs allowed for inter-year and year-to-year banking and trading of credits to account for different fuel needs and infrastructure throughout the United States. It meant that biofuels could be used where it made the most sense and allowed a marketplace to develop in the buying and selling of RINs. The EPA says the RIN market is working as it was designed to, incentivizing the production, distribution and use of renewable fuels. Still, the program remains mired in controversy for three principal reasons: time, transparency and trading.
Time: Waiting in Line Takes Too Long
Although RINs have a limited two-year life span, EPA has had difficulty making yearly RFS decisions and has sometimes made decisions many months late. As a result, EPA has moved the compliance deadlines accordingly.
when a RIN is created. The market does not know its final resting place until the obligated party deadline. This could be two years later or more. In the meantime, a RIN could be on a fast and furious ownership run, trading hands several times before an obligated party drops it into one of many RFS compliance buckets. During this volatile period of ownership, nobody knows who owns what. This is because once the blender is allowed to separate the RIN from the physical gallon, it becomes blindfolded musical chairs until the music stops and everybody tries to take a seat (RIN compliance deadline). This tends to favor business people who have a trading desk and a big balance sheet.
Trading: Who Gets to Grab the Brass Ring?
Trading was envisioned by Congress and regulators, but the RIN system was never intended to become an unregulated and unsupervised speculative ride. The view was that nobody would be interested in this obscure piece of digital data and that trading would occur primarily between obligated parties. For many years, RIN values were just pennies,
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 | JANUARY 2017
TALKING POINT mostly reflecting transportation differentials between regions. Today the RIN values are much higher, so the cost of compliance got a lot pricier. So far, much of the debate has been about who wins and who loses as RIN values rise and fall. In the futures market for other commodities, winners and losers must equal out to net zero. Similarly, a holder of RINs may just as easily lose if the price goes down from where they were purchased, but we really donâ€™t know who is winning or losing other than by digging through the financial reports of publicly traded players. One thing for sure is that all this booty is not going to the biofuel producer. You can look at the margins for publicly traded biofuel companies and see that the vast majority of RIN value is carved up among the players downstream from the biofuel producer. Some say that injured refiners should just buy biofuel producers if they have a problem with RINS. That is like telling a biofuel producer to buy a refiner if they donâ€™t like the price of fuel. It is not that easy, even though about one-third of the biofuel industry is already owned by petroleum companies.
Fine-tuning the Ride
Assuming the point of obligation stays the same, there are other alternatives that might improve the situation: 1. EPA must make its decisions on time. This will: A) Give the market less time to speculate about what EPA might do, and B) Put the compliance deadlines back on trackâ€”less time to trade RINs. EPA might even consider forcing the obligated party to do an initial compliance report on a monthly basis so everyone can see how each obligated party intends to comply rather than waiting 14 or more months to find out. 2. Increase transparency. Each time a RIN trades, the new owner needs to be identified immediately. These trades are already on automated data systems through an EPA clearinghouse, so making the data available should not pose a huge problem. This information exists but EPA has not published it since 2013. EPA could also develop and publish a cumulative, real-time balance sheet for RINs. 3. Limit trading. Other traded agricultural commodities have position limits, daily price movement limits, and the status of the ownership is known (commercials versus noncommercials, for example). While not exactly com-
parable, RINs trading could be limited to those with a nexus to the industry and the status of ownership (obligated party versus nonobligated party) could be made known immediately. There could be other practical ideas to reduce the speculative aspect of trading.
The End of the Line
Rather than changing the point of obligation, EPA should reevaluate allowing biofuel producers to separate the RIN from the physical gallon. Under current rules only the blender can separate the RIN. Decoupling RINS at the point of manufacture would not solve many of the problems noted here, but small refiners could at least deal directly with biofuel producers, rather than having to buy from their petroleum competitor or a speculative holder. We may not be able to stop the merrygo-round of RIN compliance, but we can set it at a better pace, and keep the big kids from jumping the line. Author: John Campbell Managing Director, Ocean Park Advisors 310-670-2093 firstname.lastname@example.org
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_'HV0RLQHV_0DQNDWR_5RJHUV_6LRX[)DOOV_:DWHUWRZQ JANUARY 2017 | Ethanol Producer Magazine | 39
Tax Reforms Will Require Attention By Donna Funk
The recent elections are likely to have dramatic impacts on U.S. agriculture and on the ethanol industry. With the White House and Congress controlled by one
political party, there is a high likelihood that we will see rapid action on a range of administration and congressional priorities including tax reform, modifications to environmental policy and adjustments to U.S. trade. While many of these policies may be beneficial, there is also the potential that policies could be adopted that would negatively affect agriculture and renewable fuels. For the ethanol industry, the stakes could not be much higher. During the Iowa caucuses, Donald Trump spoke broadly of his support for ethanol and for the renewable fuels standard. However, President-elect Trump selected Myron Ebell, director of the Competitive Enterprise Institute, to lead his EPA transition team. Ebell, who in November was speculated to be in consideration for administrator of the U.S. EPA, is a long-standing opponent of the renewable fuels standard. In addition to working to make sure the administration supports renewable fuels, the ethanol industry will undoubtedly have its hands full fighting to protect the renewable fuels standard in Congress. Another topic that will be critically important to the ethanol industry in the coming years will be tax reform. House Speaker Paul Ryan has indicated that comprehensive tax reform will be one of his highest priorities when Congress reconvenes in January. Depending on which proposals are finally enacted, tax reform could positively or negatively impact the profitability of ethanol plants and corn farmers for years to come. Congress last tackled comprehensive tax reform 30 years ago in 1986. The changes to the U.S. tax code this go-round are likely to be every bit as significant as the 1986 reforms and will have wideranging effects on businesses and individuals alike. The overall goals of tax reform articulated by Speaker Ryan are laudable and include tax simplification, a lowering of corporate and individual tax rates and an emphasis on economic growth. Like everything, of course, the devil will be in the details. To know whether tax reform will help or hinder the ethanol industry and corn farmers in general, we’ll want to take a holistic look
40 | Ethanol Producer Magazine | JANUARY 2017
at the tax reform proposals as they are released. While eliminating a particular deduction may be something that many agricultural producers wouldn’t like, if tax rates are lowered as a result of a tax reform package, the package as a whole may be beneficial. The calculus becomes even more complex when one considers concepts such as “border adjustability” as referenced in the House Republican Tax Blueprint. Under border adjustability, sales of products outside of the U.S. would likely not count as revenue for U.S. income tax purposes while imported products may be subject to taxation. In order to properly evaluate such proposals, we must first see the proposed legislative language and then run the numbers against past tax returns for actual plants and actual farms. It’s only by going through this process that we’ll learn whether the benefits will offset potential negative effects on the ethanol industry and its producers. With any change this significant, there are bound to be winners and losers. The ethanol industry must be proactive and engage in the tax reform discussion to ensure that its interests are taken into consideration as bills are drafted and moved through Congress. At K·Coe Isom, we’re helping our clients look at these types of issues to understand how tax reform will affect specific businesses as well as entire industries and market sectors. We’re also working closely with key members of Congress to make sure they understand how their proposals could affect U.S. agriculture. As we track these legislative proposals, we’re also helping our clients implement proactive tax planning strategies so that their businesses can achieve the maximum benefits when tax reform is signed into law. The coming years will present both challenges and opportunities for corn farmers and for the ethanol industry. We need to work together to make sure that Washington encourages growth and supports U.S. ethanol. Author: Donna Funk Principal, K·Coe Ison email@example.com 800-303-3241 Co-author: Brian Kuehl, Director of Federal Affairs, K·Coe Isom
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42 | Ethanol Producer Magazine | JANUARY 2017
BUILDING PARTNERSHIPS, GROWING MARKETS February 20–22 • 2017
Program Now Available nationalethanolconference.com
AT RFA’S NEC 2017, YOU’LL ACCESS:
Ethanol producers and marketers
Networking Opportunities: Build key industry relationships
Business Development: Conduct business with high value Domestic and Global industry customers and clients under one roof
Finance/Banking/Traders Risk Management Gasoline marketers Transportation Industry Policymakers and government Ethanol Industry Suppliers Energy and Environment Officials
Government Policies: Learn the latest information on issues and regulations affecting the industry to be prepared International Buyers Program: Participate in this exclusive program for U.S. companies interested in exporting your product overseas or expanding your sales to new markets
Agricultural Leaders Academia
Hilton San Diego Bayfront • San Diego, CA
INCREASE YIELDS, REDUCE SUGARS: YOUR RECIPE FOR SUCCESS Introducing the SYNERXIA® Fermentation System, robust bioengineered yeast paired with uniquely superior enzymes designed to deliver consistently high yield. This innovative pair offers up to 2% additional ethanol, with up to 20% reduced sugars at drop. And when you trial the SYNERXIA® Fermentation System, you’ll receive full end-to-end technical support to optimize for your unique operation – because we’re here to help you succeed. If you’re ready to stop sending over 20,000,000 pounds of sugar out the door with your DDGs, contact your DuPont representative or call 1-800-847-5311.
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SYNERXIA® FERMENTATION SYSTEM