Western ethanol producers ‘caught in the jaws of a vise’ with short corn supply and weak biofuel demand
Gerald Bachmeier, chief executive officer of Red Trail Energy, Richardton, North Dakota, and Philip Coffin, vice president of Midwest AgEnergy LLC, at Underwood, North Dakota, discuss countermoves to a drought for acquiring local corn and getting it from eastern producers. Both companies started their histories by bringing corn in on unit trains and are preparing to do it again. Both are planning to inject and store carbon dioxide byproducts for a market advantage.
RICHARDTON, North Dakota — The 2021 drought has stressed ethanol producers across the Midwest, and it's worse in western North Dakota, where ethanol plants are still unable to judge the size of the corn crop.
Most local corn suppliers for Red Trail Energy LLC of Richardton, North Dakota, and Midwest AgEnergy LLC of Underwood, North Dakota, received less than 8 inches of seasonal rain, and 20 days of 100-degree temperatures.
With the weather pushing corn production down, the companies are paying more for corn supplies and reaching out to corn by rail. Longer-term, both companies are working on adding to the environmental value of their ethanol by injecting carbon dioxide deep into the earth for long-term storage.
Gerald Bachmeier is chief executive officer at Red Trail. The plant grinds 22 million bushels of corn a year and produces 65 million gallons of ethanol. It is owned by 938 investors, of whom 85% live in North Dakota.
“This year, it’s going to be extreme, to get that there bushel,” Bachmeier said. North Dakota ethanol producers always compete with export shuttle-loading elevators that send corn to China and elsewhere.
In recent years, 65% of the company’s corn has come from within 75 miles of the plant. There are “pockets" of over 100-bushel-per-acre production in that radius this year, but many acres were chopped for feed, not making 25 bushels to 30 bushels per acre.
The company is bringing in more corn by rail. And they’re launching one plan to sequester carbon dioxide byproduct more than a mile into the earth, improving the value of their ethanol in California.
A hundred mile drive to the northeast, Phil Coffin, serves as vice president of commodities and risk management for Midwest AgEnergy Group LLC.
“We’re kind of caught in the jaws of a vise,” Coffin said, describing the corn and ethanol markets.
National corn supply is tight, which means corn prices are high, while ethanol prices are soft. Blue Flint must attract production from farther away but the “cost of that corn may or may not be a price that allows us to operate an acceptable margin,” he said.
Built in 2008, Blue Flint uses “waste heat” steam supply from Great River Energy’s Coal Creek Station plant. The plant served by the Dakota, Missouri Valley and Western Railroad, a regional line that leases track from Canadian Pacific Railway. When Blue Flint was getting started Dakota, Missouri Valley and Western initially supplied almost 100% of the plant's corn. The company later added a plant at Spiritwood, North Dakota, supplied by BNSF Railroad.
Each of Midwest AgEnergy’s plants grinds about 25 million bushels of corn. They both market ethanol through Harvestone Commodities LLC, based near Nashville, Tennessee. Midwest AgEnergy ethanol goes primarily to refiners in Canada.
Instead of the natural gas most of their competitors use, the Blue Flint Underwood plant uses the coal-fired electrical plant steam to heat fermenters and distiller’s grain dryers. It produces about 75 million gallons of ethanol per year.
The company sells ethanol to California, where state standards requires low-carbon fuel. Midwest AgEnergy competes with other low-carbon ethanol producers. It sometimes sells ethanol at a loss to receive the carbon credits.
In recent years, Blue Flint has gotten 75% to 80% of its corn locally. With the drought, Coffin would be “thrilled” if local corn supplies half of its corn needs.
To keep its plant running, Midwest AgEnergy a month ago paid up to 90 cents a bushel over Chicago futures, prior to the new crop showing up. (Others were paying $1.50 per bushel over futures price.) They were paying a “plus basis” of 40 cents a bushel on Sept. 27, 2021, with a “positive basis” of 40 cents, plus free drying. For perspective, Blue Flint normally would be paying 40 cents to 50 cents per bushel “negative basis” — a difference of 80 cents per bushel to $1 per bushel.
One of their suppliers is Aaron Celley, who farms with his father, Roland, at Regan, North Dakota. They market all of their corn through Blue Flint. The Celleys typically produce a 100- to 140-bushels-per-acre yield. This year, it’s looking like 50 to 80 bushels per acre, Aaron said. To respond to the basis, the Celleys tried harvesting corn at 25-26% moisture, but on Sept. 27, he was expecting 20-22% moisture.
Overall, Coffin estimates local producers’ yield averages will be 50 to 60 bushels per acre. He thinks statewide, up to 30% of the state’s corn acres will be harvested for feed, versus a typical 7% to 8%.
As of Sept. 20, Canadian Pacific Railway responded to a Blue Flint request to publish a freight rate, allowing the plant in Underwood to provide access to corn in Minnesota, South Dakota, Iowa and Wisconsin. Midwest AgEnergy hadn’t committed to any shipments, as of Sept. 28. The CP source will be a “fall back” when the local source of corn is tapped out, Coffin said.
Further, Midwest AgEnergy earlier this year announced its intent to store carbon dioxide in the ground to qualify for low-carbon markets, similar to the Red Trail efforts. If all goes well, the project could be completed in the next two years.
Back to future
Red Trail, which started producing ethanol in 2007, has only "railed-in” one trainful of corn since Bachmeier became manager in 2010.
In a normal year, they buy more than 95% of their corn directly from farmers, with the balance from elevators that don’t load shuttle trains. Bachmeier thinks this year’s yields will end up averaging 60 to 70 bushels per acre.
“We will have to source corn from the east, and it will increase our transportation costs,” he said, mentioning the Red River Valley or Minnesota, or Illinois. He expects extra basis will add $11 million to $16 million to their costs.
In 2020, the industry was hit hard by the COVID crisis, which reduced traveling. Red Trail still ended up with a good year. When basis levels shot corn bids up to $8 per bushel per acre, Red Trail “chose not to buy that corn,” Bachmeier said.
Instead they ran their plant on corn they’d already sourced and in July took an extended maintenance shut-down. They resumed production in August and in September have slowed production to match the corn that has been reasonably priced.
Carbon capture, storage
Looking beyond the drought, Red Trail is spending $35 million on new projects for carbon storage and pharmaceutical markets. If the project goes as expected, it'll be completed no later than Jan. 15, 2022. The company plans to liquefy CO2 and pump it more than a mile into the earth from a point on their property.
That will lower Red Trail’s “Carbon Intensity” score of 68 to a range of about 38 to 40. Most ethanol plants are run from the 70s down to 58, depending on technology.
Depending on the market for carbon, the low CI score should be worth 34 cents to 35 cents a gallon, or about $1 per bushel of corn. Red Trail also invested in pharmaceutical-grade ethanol, used for things like hand sanitizer.
Red Trail is a part owner of Renewable Products Marketing of Shakopee, Minnesota, which added a new industrial products marketing division to market the specialty products. RPM markets for 18 ethanol producers, only three of which make the pharmaceutical grades. No other has the low-carbon pharmaceutical product.
While they’re helping themselves, ethanol companies are watching federal fulfillment of the Renewable Fuel Standard. They’re watching how infrastructure dollars will help agriculture. Bachmeier would like to see more low-carbon fuel standard markets develop in the Midwest and Northeast.
“We’d like to see that sooner than later,” he said.
Bachmeier wants any state programs that incentivize carbon sequestration to ensure that the value remains in the state. He’d like the 45Q tax credit, which incentivizes carbon capture, to be a payment, not a tax credit.
He also thinks that it may be time for the North Dakota to reinstitute a state “counter-cyclical” incentive program for ethanol.
“In times like this, when you have the pandemic and the drought right behind it, maybe the state should look at something like that,” he said.
If a program like that could be brought back for a year to help counter the basis level by 20 to 30 cents per bushel, that would help them survive, he said.