Alcohol. One of the most controversial liquids in history.
It’s so controversial there was actually a constitutional amendment enacted to ban it. Then there was a constitutional amendment enacted to make it legal again. Incidentally, these amendments also effectively destroyed and then resurrected the infant fuel ethanol industry.
Fuel ethanol is no less controversial today, and its precise role in the global agricultural economy is one of the most complex questions faced by producers in a generation. To be sure, ethanol is a value proposition. It’s the cheapest octane source on Earth, so it allows cheaper-to-refine, lower-octane gas to be blended up to become the 87-octane fuel we buy at the pump. Refiners then split the difference with consumers, and each pocket as much as a dollar per gallon.
So why should sorghum producers even concern themselves with the complexities of the Renewable Fuel Standard? First, it acts as a safety net for ethanol demand much like commodity loan programs and put options do for agricultural commodities. Second, it helps ethanol scale the E10 blend wall. With a 90% market share, petroleum-based fuels have an effective monopoly at the pump. The RFS was designed to help a fledgling industry break through this barrier.
Third, and most importantly for sorghum producers, the RFS creates opportunity for next-generation feedstocks. As I’ve written a couple of times, sorghum has incredible genetic diversity. It can be bred to produce starch, sugar or cellulose — the three plant energy sources around which the RFS is built. This is obviously great news for the sorghum industry.
Under the RFS, starch is mostly used to produce conventional ethanol. Grain sorghum ethanol plants are unique in that they can also produce advanced ethanol from starch. Typically produced from sugar (i.e., sweet sorghum syrup), advanced ethanol carries a premium, which can be partially passed on to sorghum producers by ethanol plants. The premium for advanced ethanol today is about 30 cents per gallon. With an even split of the premium, this means a bid about 40 cents higher for sorghum.
Before you pick up the phone and call your ethanol plant asking why you haven’t seen your share of the advanced ethanol premium, remember that some modification of the plant is needed before the fuel can be produced from sorghum. The premiums have been pretty variable over the last few years, so plants have been waiting to undertake modifications until stability returned to the market. Change is slow, but I fully expect to see premium stability and advanced ethanol production from grain sorghum within the next couple of years. When that day comes, you have my permission to call your ethanol plant and Renewable fuel standard matters to sorghum growers ask for your share of the premium.
Beyond advanced ethanol is cellulosic ethanol. As I wrote last month, it has taken a while for the industry to find its feet. But the RFS premium cellulosic ethanol carries, coupled with tax and loan guarantee incentives both at the state and federal levels, have helped break technological barriers once and for all. Plants are actively bidding for cellulosic feedstocks, and high biomass sorghum is high on their list. Like with advanced ethanol, the higher the premium for cellulosic ethanol, the more plants are able to pay for cellulosic feedstocks.
The details of these premiums are pretty tedious. Don’t spend too much time on them, but remember they are helping to drive demand for sorghum and will continue to do so in the future — just like the RFS is helping shore up ethanol demand. Most importantly, remember the value proposition offered by ethanol, controversy or no controversy.
Chris's columns appear in Kansas Farmer magazine monthly. You can view this column published in the online edition here.