As cries continue for an EPA waiver of the government’s ethanol production mandate, a new study out of Purdue University considers what might happen to corn prices if a waiver is granted. Among the takeaways: a waiver won’t be a quick fix for rising corn prices.

The analysis comes as the governors of drought-hit Arkansas and North Carolina – joining those from Maryland and Delaware – made formal requests to waive the Renewable Fuel Standard (RFS).

Asking for a “full or partial waiver,” Arkansas Gov. Mike Beebe – who, at the same time, made $2 million in disaster funds available to assist livestock producers in the state -- was not shy in linking the passage of the RFS to higher feed costs. The RFS, he wrote in a letter to the EPA, has “resulted in a long-term shortage in grain in our nation, especially corn, potentially forcing reduced production and job loss and increasing food prices for consumers worldwide…

“Because of this policy, ethanol production now consumes approximately 40 percent of the U.S. corn crop and the cost of corn for use in food production has increased by 193 percent since 2005.”

The Purdue study – titled “Potential Impacts of a Partial Waiver of the Ethanol Blending Rules” -- was the topic of a Thursday (August 16) webinar (archived here) sponsored by Farm Foundation NFP. It says that corn prices could drop with a waiver but study authors cautioned the many variables involved mean a complicated picture.

How complicated? Consider that in 2012, the RFS mandates 13.2 billion gallons of ethanol must be blended with gasoline. That total jumps to 13.8 billion gallons in 2013.

However, in recent years, the blends have exceeded the mandated amounts by 2.6 billion gallons. Those 2.6 billion gallons can be considered blending “credits” -- renewable identification numbers, or RINs — allowing them to count toward blending totals in the future.

“It is very clear” that the livestock producers must make the most adjustments in the face of the drought “if there is no flexibility in the ethanol use of corn,” said Wally Tyner, Purdue economist and co-author of the study. “But that is, perhaps, a big if.”

He cautioned to tread carefully with assumptions that an EPA waiver will solve the issues caused by the drought. “The economic harm has been done by the drought. The corn price is substantially higher. The losses amount to tens of billions of dollars.”

An EPA waiver “can’t change that. They can’t change the loss. They can only redistribute it among the affected parties.”

If refiners and blenders don’t have, or choose not to use, ethanol blending flexibility “a waiver has very limited impact,” continued Tyner. However, the use of prior RINS could reduce the corn price an estimated “67 cents per bushel. For a small waiver it could be around 47 cents. For a larger waiver it could be up to $1.30 per bushel.”

What would be the effect of a partial waiver on gasoline prices?

“If there’s a partial that results in less corn being used in ethanol that would put downward pressure on the corn price and downward pressure on the ethanol price,” said Tyner. “That’s ten percent of gasoline so it (wouldn’t be) a huge impact.”

Any timeline for EPA action on a potential waiver of the RFS?

“No,” said Tyner. “The EPA isn’t obliged to respond quickly but now that four governors have petitioned, they do have to respond.

“Normally, they’d make their decisions for obligated parties in late October/early November. If they’re going to issue a partial that would be a good time to do it in terms of communicating information to the market in a timely manner. But they’re not obliged to do that.”

If blenders use the RINs in 2012/2013 how might that affect future options?

“Part of it comes back to how long it takes refiners and blenders to change the current system,” said Tyner.

“In the process of preparing this paper, some of the people connected to the oil industry told us that we’re so locked into the current system that it would take a bit of time to change. (They) implied that we’d have to perceive that a longer-term change in the structure of the industry would be useful before making the change.

“Others said, ‘No, we can change on a dime. The minute it’s economically attractive we’ll make the change.’”

Over the past five or six years, the demand for corn “has simply outpaced the ability to increase the supply,” said Christopher Hurt, Purdue agricultural economist and study co-author. With the RFS, “we’re already in a period where the rate of growth in the mandate has really slowed down. The year-to-year increase has slowed down. In the next several years, as we approach 2015, we’ll be flat-lining on the RFS for conventional ethanol from corn. We’ve seen a massive response from corn growers to meet this demand.

“The point is that our stock, our inventory, will get down to virtually nothing at the end of the year. There’s no reserve for some of these uncertainties.

“In 2014 – and we’re looking at, perhaps, 100 million acres of corn planted in 2013 – if we could get back to normal production, we’d have the possibility of increasing stock levels. If we have an extra, say, 500 million bushels of corn that’s more flexibility built into our marketing system.”