Ukraine war could shape looming ethanol debate

A mandated review of renewable fuels support in the US may well prompt 'food vs fuel' questions as the ongoing Ukraine war leads to fears of widespread malnutrition in the developing world.

US lawmakers’ desire to avoid ‘food vs fuel’ debates has long influenced their approach to the mandated inclusion of largely corn-based ethanol into transportation fuels.

The Renewable Fuel Standard (RFS) program was established in 2005 and refined by the Energy Independence and Security Act of 2007, before becoming a key component of the grain demand and farm earnings that helped attract more institutional capital into row crops.

Increasing non-food components of ethanol production was a key goal of the policy, which called for scheduled increases in total biofuel production from 9 billion gallons in 2009 to 36 billion gallons in 2022. That gradual increase was designed to allow time for industries and infrastructure supporting alternative non-food feedstocks to develop – which they have not, as corn is still the primary feedstock for ethanol, with about 40 percent of US production currently devoted to the market.

The Environmental Protection Agency was already scheduled to reassess the administration of the RFS in 2023. Much as the initial drive to blend ethanol into US gasoline was framed in part by a drive for energy security in the midst of a global war on terror, the coming debate on ethanol will take place against a backdrop of war between two of the global ag market’s key suppliers.

The possibility that rippling effects of the Ukraine war could impact the RFS was raised by geopolitical analyst Peter Zeihan at Peoples Company’s Land Investment Expo in January. Zeihan detailed how the Ukraine war and resulting trade restrictions are already limiting fertilizer availability and leading to soaring costs, which he predicted will contribute to dire near-term food security challenges for the developing world.

“In a world where hundreds of millions of people are going to be suffering from malnutrition within 12 months, you have to question whether ethanol is something we want to participate in,” he told the Iowa crowd. “The market is going to be pushing us away from ethanol. The moral argument of trying to feed the world is going to be pushing us away from ethanol.”

Some of that market push was examined by Farmer Mac last year in its quarterly newsletter, the Feed. It detailed how following years when ethanol supply and demand stayed in relative harmony, the sudden changes in transportation patterns caused by the covid-19 pandemic resulted in increased inventories and low prices that pushed some producers out of business.

“Each year, the EPA takes longer to post the following year’s requirements and there is growing unrest in political circles about the future of biofuel mandates,” Farmer Mac analysts wrote. “With rising consumer demand for electric vehicles that do not consume conventional fuels, future demand for ethanol feels less certain today than it did in years past.”

Production and demand have since recovered from post-covid lows in part through generous government support programs, but it is quite clear that ethanol markets sitting at the intersection of transportation, climate and energy markets face a highly complex future.

In an industry outlook published last year, Renewable Fuels Association president Geoff Cooper wrote that current conditions require producers begin to look “beyond ethanol’s traditional use as a fuel for passenger vehicles,” and embrace new applications of its low cost and carbon attributes in other energy, chemical and consumer product markets.

Proponents like the RFA have long argued that characterizing the use of corn and its byproducts for ethanol as a threat to food security downplays other contributors to food prices, and overlooks bio-refiners’ contributions to the production of animal feed.

Salient though these arguments may be during peacetime, if Zeihan’s fears for the worst in global food security does indeed materialize over the next year, US corn markets and the policies that support them could be set for important changes that investors will have to watch closely.