How does this summer's drought-related backlash on corn ethanol affect the advanced biofuels industry? During today's OnPoint, Tom Buis, president and CEO of Growth Energy, the country's largest ethanol trade association, explains why he believes the severe drought does not qualify as an environmental catastrophe for a fuel standard waiver. He also explains how his industry's challenges are affecting the future of advanced biofuels and talks about the role of biofuels in the presidential election.
Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Tom Buis, president and CEO of Growth Energy. Tom, it's good to have you back on the show.
Tom Buis: Great to be on, Monica.
Monica Trauzzi: Tom, as the largest ethanol trade association, it seems like it's been a pretty rough summer for you guys. There's been a lot said against the RFS and in light of these rising food prices that we've been seeing and the summer drought, an RFS waiver makes sense to a lot of people. Why don't you think it makes sense considering the fact that we're seeing the worst drought in 60 years?
Tom Buis: We are seeing the worst drought in 60 years, Monica, and it's unfortunate because we had a big crop planted, but yet we're still going to have a decent corn crop. It's not going to be perfect. Farmers are just getting into harvest and, you know, there's been a lot of fear and a lot of panic that we're going to run out of corn. Well, you know, I grew up on a farm. I farmed for 25 years before coming to Washington and we've never run out of corn. Do you run out of cheap corn? Absolutely, but markets work and markets will sort out and ration the best and highest use of corn. And I would dispute that corn prices are driving up food prices. There's no way they should be in the grocery store now. All the corn that was bought or that's been processed for any type of food, whether it's a miniscule amount for cornflakes, had been previously purchased. They're not using eight dollar corn today. And the livestock industry, there's a long lag time before that will show up in any higher meat prices.
Monica Trauzzi: Within the RFS though there is the ability to waiver in the event of economic or environmental catastrophe. So then how do you interpret that if that does not apply to what we're seeing right now?
Tom Buis: Well, the RFS also contains a lot of flexibility already built-in to address just this situation. For example, obligated parties, the oil refiners, are allowed to carry forward RFS credits or RINs. There's about 2.6 billion RINs that are currently in surplus already in the market. Plus, if you run out of ample supply of ethanol, they can actually carry a deficit forward into the next year. So that's flexibility, plus, you know, we've seen this picture before. This is not the first run. Four years ago, when everyone worried about high prices, within months prices plummeted. Corn prices dropped over half. Today you've already seen markets start to adjust. The ethanol industry is producing 15 percent less than we were a year ago. You're seeing export demand probably come off and you'll see feed demand come off, because, one, a lot of cattle producers are liquidating their herds, not because of the lack of corn and ethanol, it's because mother nature didn't rain on their pastures. And cattle, beef cattle, get 80 percent of their weight from pasture and hay, not -- and only the final 20 percent from corn. So it's far from over. I think we just have to continue to monitor it. You'll see markets adjust, they always do.
Monica Trauzzi: So, are the governors from North Carolina, Arkansas, Georgia, New Mexico, are they just flat wrong when they are suggesting that there should be a waiver?
Tom Buis: Yes, they are and what they have to be able to demonstrate is that economic harm is caused by the RFS. I don't know, you know, it doesn't take 100 media outlets just to tell you that the economic harm is caused by Mother Nature, not the RFS. And the market will sort out how much goes to ethanol, how much goes to livestock and, you know, the governors are premature. We don't even know how big the corn crop is. Harvest is just now beginning.
Monica Trauzzi: But if we didn't have corn going to fuel, we would have corn, more corn going to other resources.
Tom Buis: Well, you also wouldn't have as much corn available without the ethanol industry, because farmers responded to the new markets by planting more. We also can demonstrate that we have more feed going for livestock today because of the ethanol industry than we would have. You know, if you go back to the drought in 1988, we'd be in a lot more difficult economic situation without the ethanol industry that has spurred production, spurred innovation, increased yield, increased availability of feed. And, you know, the governors, every one of them said we're using 40 percent of the corn crop to produce ethanol. That's just disingenuous, because it's 40 percent of the gross crop. The net, because a co-product we produce is called Distillers Grains, which is a high-protein, high-value livestock feed that goes back into the marketplace. And when you net that livestock feed that we put back into the industry, it's only 16 percent of the corn crop. There's hundreds, there's thousands of uses of corn. I don't hear the governor saying let's not produce corn de-icer for our roads, let's not stop exports to China --
Monica Trauzzi: So, does the production of ethanol bear any responsibility for the high corn prices that we're seeing, bottom line?
Tom Buis: Well, I think all users bear the responsibility of high corn prices when you have a short crop. But you've got to keep in mind, we didn't cause this. Corn was trading for five dollars a bushel this spring. Ethanol production has gone down. It's all a result of Mother Nature and farmers respond. You'll see even more acreage next year planted. We'll see an even bigger crop because of the higher prices, plus a lot of people just want to look at the United States. If you look at the world grain supply, on feed grains it's going up because of responding to higher prices over the last few years.
Monica Trauzzi: Does this summer's backlash against ethanol just put a microscope on the fact that this fuel is just too easily affected by market factors?
Tom Buis: No, I don't think so. You know, I think what happens here, when you look at the governors and the states that filed the waiver, they're coming primarily from big chicken state -- big chicken producing states. And for decades, Monica, the chicken industry counted on the federal government to subsidize grain farmers so they could have low-cost -- below the cost of production feed. Those days are over. You know, the taxpayers no longer subsidize farmers, grain farmers to the degree they did a few years ago. The next farm bill that will even go down more. It's actually the marketplace working and anyone who says we ought to dedicate one commodity that has hundreds of uses for one use, so that they can make a profit, you look at those chicken companies, those big integrated companies, they've had record profits over the last several years. Actually, the ethanol industry is hurting far more and far more economic harm than they are.
Monica Trauzzi: So, we're talking about corn ethanol here, but the U.S. has a whole other fuel source in cellulosic ethanol. How at odds are the corn ethanol and advanced biofuels industries?
Tom Buis: I don't think they're at odds at all. Matter of fact, we have a new biofuels producers council that includes everybody, all the fuels of the future, the current fuels, all renewables and we're all united in defending the RFS. Part of these attacks are opportune moments, all right? They've got the wind at their back because you've got a drought going on. But the overall effort is to stop the next generation of biofuels and the feedstocks that they can produce. If you look at the attacks on cellulosic ethanol by API and NPRA, if you look at the attacks on even advanced drop-in fuels for the Navy, you'll see some people have the strategy all of the above, as long as all of the above doesn't include renewable energy sources.
Monica Trauzzi: But it seems that bad news for you guys means bad news for the advanced guys as well.
Tom Buis: Absolutely, that's why we're united.
Monica Trauzzi: But why should they bear some of that burden if they're not really responsible for it?
Tom Buis: Well, I don't follow you there, but the RFS is what we're all united around. And the renewable fuel standards, this passed five years ago, all right, we're the fifth year of a 15-year plan. It's been a success thus far. The first generation of ethanol is meeting and exceeding its targets. The next generation ran into a huge roadblock when we had the economic collapse in 2007, 2008. Investors and lenders went to the sidelines. You're just now starting to see them come back and for those who want to use the drought to go after the RFS, they're really trying to stop that next generation.
Monica Trauzzi: I want to get a politics question in here.
Tom Buis: Sure.
Monica Trauzzi: Mitt Romney's energy plan supports the ethanol standard. How much of a role are you anticipating this will play in the presidential election?
Tom Buis: Well, in some areas I think it will play, Iowa for example, Ohio, some of the targeted states it will be a big issue and he should support it. President Obama supports it. You know, this is not a partisan issue. We don't want it to be a partisan issue. The ethanol industry is the only significant alternative to foreign oil that we've developed in this country through public policy in the last 40 years. We're 10 percent of our nation's fuel. We've created direct and indirect 400,000+ jobs, $50 billion in GDP. We've cleaned up the environment. We've saved consumers at the pump and we've revitalized rural communities. Now, tell me what's wrong with that.
Monica Trauzzi: And used a lot of corn as well.
Tom Buis: Yeah, but the corn, if you go back before the ethanol industry, we were producing 8 billion bushels of corn a year. We're now 12 to 13 virtually every year, it will be a little less than that this year. That wouldn't have happened without the ethanol industry. You've got to look at the overall market impact.
Monica Trauzzi: All right, I have to end it there. Thank you for coming on the show.
Tom Buis: Thank you.
Monica Trauzzi: Good conversation.
Tom Buis: Good to see you.
Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.
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