Good Products Sell Themselves⚡

Ethanol's marketing problem.

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Every so often I catch up with old friends or meet new acquaintances who are curious about what I know about agriculture. Having traded it for over a decade, I might know a thing or two about a thing or two. The questions come off pretty standard like most inquiries,

“What do you mean you ‘trade wheat’? What do you do exactly?”

If you’ve ever traded anything before and get asked this question, you already know from trial and error what not to say. Having mastered this over the years, I have crafted responses for those who think of trading as a foreign language. I explain what agricultural trading is as easily as possible and then entertain them with facts they can relate to about the agriculture industry.

“Guess how many railcars are part of a freight train?”
”Which state is the biggest agricultural state?”
”Do you know you have corn in your gasoline?”

Most questions or facts fly over people’s heads. They believe food comes from a grocery store somewhere in the Midwest and soybeans are solely grown for edamame. We can’t blame them can we? We live in a globalized world and between your average consumer and your average farmer, there is a widening disconnect. Therein lies the problem and a massive opportunity.

Ethanol 101🌽 = ⛽

With your average consumer left in the dark about the agricultural supply chain, do you want to bet on their knowledge of ethanol?

Did they teach us this in high school?

Pictured above is what most consumers see when they arrive at a gasoline pump. An array of prices of different blends of gasoline with octane ratings - 87, 91, 93 - and if they are lucky, they see E-15 or E-85 options. What do they mean?

93: Gasoline with 93 octane rating (ethanol content up to 10%)
91: Gasoline with 91 octane rating (ethanol content up to 10%)
87: Gasoline with 87 octane rating (ethanol content up to 10%)
E-15: Gasoline with ethanol content from 10.5% to 15%
E-85: Gasoline with ethanol content from 51% to 83%

Basically, there are differerent gasoline grades, all of them have ethanol, but some have more than others. The octane levels determine how much compression the fuel can withstand before it ignites. The gasoline blends with 10% ethanol are suitable for most engines. However, blends of E-15 and E-85 are not compatible with all engines and are determined by the warranty of the auto manufacturer. Not only are the blends different, so are the prices. Ethanol blends are cheaper than gasoline, most of the time.

In the United States, Ethanol is made up mostly from corn. Over 35% of annual US corn production ends up being processed into ethanol. This means ethanol is a huge driver of corn demand. As you can imagine, if you can convince consumers to use more ethanol in their gasoline, then that should translate to increased corn demand and influence the price of corn positively.

Now let’s get back to the pump. Put yourself in the point of view of the average consumer who sees 5 different options of fuel at this pump. Three of the blends are something you are used to seeing, but the other two appear foreign to you. Would you gamble your cars auto warranty filling up with a niche fuel you have never used to save a couple bucks?

Let’s assume you are sharper then the average consumer and know your vehicle is capable of taking higher blends of ethanol up to 85% (E-85), what then? Well, that’s a calculation, and it’s one you can’t do quite so easily in your head. To make life easy, we’re using eFlexFuel’s E-85 calculator to determine if it is worth filling up E-85 based on the prices above.

According to the calculator, using the prices from earlier at this specific gasoline station (E-85 = $1.94, Gasoline $2.25), fueling up E-85 does not save you money. In fact, in this situation, fueling up using E-85 actually loses you money as ethanol has a lower energy content then gasoline, thereby reducing miles driven 15% to 27% versus ordinary gasoline. That is not to say E-85 loses the consumer money all the time. When E-85 is priced right, it should save you money, but that is determined by a combination of the market and the fuel retailer’s pricing power.

What all this means is that your average consumer has to be aware of increased ethanol blends, if the fuels are financially worth it, and if their cars auto warranty will be voided if they use it. That’s a bit of a hassle for the average consumer to make it work, especially if they live in an area far removed from the corn belt where ethanol is plentiful.

The illusion of choice 🚗

We’ve outlined some hurdles which hold back E-15 and E-85 adoption already, but there are several others.

Availability of Flex Fuel Vehicles (vehicles capable of running on E-85) have peaked years ago. In 2014, there were 90 models offered. Today there are 17. For model year 2023 (incomplete), there are a total of 12 models offered, an 86% decrease since the high.

Not only have auto manufacturers turned a blind eye to Flex Fuel Vehicles (FFV), it appears the growth story has shifted gears entirely from FFV’s to electric and hybrid-electric vehicles. The end result is demand destruction of Ethanol entirely in electric only vehicles and a reduction of ethanol demand from higher efficiency hybrid-electric vehicles.

If you’re reading through the lines, you’re probably realizing by now that Flex Fuel vehicles have turned from a mass consumer product into a niche, specialized product. That is true, most E-85 fans literally have to go the extra mile to support the ethanol industry.

Don’t ever talk about ethanol at a party.

To add another level of complexity to the madness, let’s pull up a chart of how many gas stations support E-85.

The bad news hits hard… of the +116,000 fueling stations in the US, only 5,600 offer E-85 fuel, or less than 5%. Not only do consumers have limited options in purchasing Flex Fuel Vehicles these days, they don’t have a wide network of fueling stations that support E-85 blends to take advantage of it.

What’s even stranger is E-15 availability, a total of 2,800 fuel stations offer E-15, or less than 2.5% of the total fueling stations! For a technology that has been around for over a decade and approved for most vehicles, you would have imagined that adoption would have matured by now.

*EPA Enters the Chatroom*

In June 2011, the US Environmental Protection Agency (EPA) approved blends up to 15% ethanol in gasoline for use in 2001 and newer passenger cars, light-trucks and medium-duty vehicles. However, E-15 cannot be sold year round in most of the United States from June 1st to September 15th.

The reason for this is a Federal regulation limiting the reid vapor pressure (RVP) of the fuel. RVP is just a fancy way of measuring how easily fuel evaporates. A high RVP is bad for the environment, because as gasoline vaporizes, it can contribute to respiratory problems and smog. During the summer months, Federal law prohibits RVP greater than 9.0 PSI (pounds per square inch.) E-10 (10% blended ethanol gasoline) measures at 10.0 PSI, but has a special one pound waiver granted by the EPA. E-15 does not share the same treatment.

The current state of summertime E-15 Ethanol

If you’re involved in agriculture or energy, you’ve probably heard a lot about E-15 recently. Several US politicians have put forward a bill to harmonize how the EPA treats ethanol blends when it comes down to the RVP. Essentially, what the politicians want is E-15 to have an equal footing with E-10 ethanol so it can be sold year round. This sounds great on paper, but does it make a measurable impact on ethanol or corn demand?

Lucky for us, the Energy Information Adminstration (EIA) has done the work already. As you can see in the chart above, there have been increasing summer ethanol blend percentages realized over time. In fact, in 2022, record summer ethanol blending was realized at 10.5%, driven by an emergency E-15 summer waiver resulting from the inflation and energy price crisis.

This is not the first time the restrictions have been waived. In 2019, President Trump ordered the EPA to allow for year round E-15 ethanol sales. Summer were of E-15 were allowed for three years until Federal courts ruled that the EPA overstepped its authority.

So now we know the incremental demand for ethanol is there for E-15, but the infrastructure and communication to the consumer are simply not. Imagine instead of 2.5% of fuel retailers offering E-15 it were 20%. That scenario would ratchet up the demand for corn farming, ethanol processing, and result in consumers being able to take advantage of higher ethanol blends, if priced accordingly.

Ethanol’s Battle Scars

Hate it or love it, ethanol is here to stay, but that doesn’t grant it a free pass. Ethanol still has to fight it out with its biggest enemy - Electric Vehicles (EV). Not only does ethanol fight this battle, traditional gasoline refiners do as well. It's no surprise that Big Oil has teamed up with Big Ag (Agriculture) to support year round E-15, something very rare coming from the Big Oil.

Given the marketing mistakes, Government and Environmental limitations, mispricings at the pump, lack of education by the average consumer, missing infrastructure, one would hope that the ethanol industry learns from their mistakes. Will they? Or is it too late?⚡