AMES, Iowa -- Even though a federal $6 billion tax credit for ethanol expired on Jan. 1, the U.S. government still mandates that the fuel industry blend 13.2 billion gallons of ethanol this year -- up from 2.1 billion gallons in 2002. And nine years from now, the U.S. Renewable Fuel Standard calls for a target of 36 billion gallons of biofuel to be blended into the U.S. domestic auto and truck fuel supply.
That's having a tremendous impact on the distillers' grain markets in Iowa and across the Midwest -- and the small towns that support their production. Bobby Martens, an Iowa State University assistant professor of supply chain management, says ethanol industry leaders need to reconsider investments in transportation equipment and infrastructure while the government adjusts policies to effectively move all that biofuel to market.
Martens and Frank Dooley, a professor in the Department of Agriculture Economics at Purdue University, teamed up on a chapter titled "Transportation and Logistics in Distillers Grain Markets," for the book "Using Distillers Grains in the U.S. and International Livestock and Poultry Industries" (2008 Midwest Agribusiness Trade Research and Information Center).
Transportation an issue with ethanol expansion
Martens says transportation has once again emerged as an issue of concern for agricultural shippers and receivers, transportation firms and public policy makers because of ethanol expansion.
"It used to be that you'd load up the unit trains and you'd send trainloads of corn out of the Midwest," Martens said. "And now, it's not loading up trainloads at elevators. Rather, now you've got a bulk ethanol commodity that is leaving the Midwest heading to blending facilities -- in the East Coast and Texas and wherever those blending facilities happen to be -- to meet the federal mandate of the ethanol blending. And that's had a major impact on Iowa, because now you have more truck traffic going up and down the roads and a shift in railroad shipments."
Martens and his co-author wrote that well before the recent U.S. ethanol expansion, agricultural leaders had expressed concerns about the infrastructure needs to support grain transportation. And he reports that those grain transportation systems are now being readjusted as the locations of corn markets have shifted because of the expansion of ethanol and its chief co-product, dried distillers grain with solubles (DDGS).
"You think about these ethanol facilities that are shipping out one or two [train] carloads of ethanol at a time vs. 100 carloads of corn at a time," Martens said. "And you have DDGS that needs to be shipped out as well to feedlots by trucks that may take different directions than your traditional flows out of the Midwest. It has fundamentally changed the flow of ag commodities out of Iowa for the first time since the railroad systems were put in."
Using Department of Agriculture modal reports
The authors used United States Department of Agriculture modal
reports that estimate tonnage movements by mode for export and
domestic markets in their modeling analysis. They arrived at
the following conclusions:
1. The effects of ethanol and related products on transportation equipment and infrastructure are large. In the short run, ethanol firms, truckers and railroads are experiencing order backlogs for new hopper and tanker cars, or difficulties in shipping DDGS, Martens reports.
2. The effects of increased truck traffic are felt most in communities and surrounding areas with new ethanol plants. According to Martens and Dooley, an ethanol plant producing 100 million gallons per year requires 110 truckloads of corn per day, while generating 35 truckloads each of ethanol and DDGS. That increase in truck traffic may strain local highway maintenance budgets -- particularly in regions with bridges in poor condition.
3. Many ethanol plants have relatively little storage for corn and outputs, with as little as 10 days to two weeks of storage capacity. Because of those limitations, Martens says plants rely on dependable transportation.
4. Once 13.4 billion gallons of ethanol capacity is reached, the industry will face the "blending wall," yet the Renewable Fuels Standards mandates consumption of 35 billion gallons of ethanol by 2022. Achieving this 2022 capacity involves investment in infrastructure to supply E85 (a blend of 85 percent ethanol with gasoline), and E85 requires an entirely different system of pumps and alternative fuel vehicles, Martens says.
5. While transportation challenges in expanding ethanol production exist, there are examples of innovative responses to the challenges by entrepreneurs. Among his examples, Martens cites two trainloading ethanol terminals -- Manly Terminal in Manly, Iowa, and Gateway Terminals LLC in Sauget, Ill. -- that have the ability to load either unit trains or barges of ethanol.
Martens is working with other ISU colleagues on interdisciplinary research addressing other supply chain topics within the biofuels industry.