What is in this article?:
- Ethanol waiver requests pick up
- Unintended consequences
- 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.
What are the long-term implications for the livestock sector?
Not very positive, said Steve Meyer, president of Paragon Economics. “We are catching up to some degree with corn demand by increasing yields every year. But the chances of having severe shortfalls in corn production – three out of five years, or something like that – are pretty small. We have seen it happen, though: in 1983, 1988 and 1993 we had a flood. Mother Nature isn’t real picky on how she screws things up for us. We have to account for that.
“We’re going to reduce these herds. I don’t see any way we won’t reduce herds across the board…
“We’re reducing our ability to produce meat, milk and eggs for U.S. and world consumers.”
What about unintended consequences of a partial waiver?
Hurt said there could be “a lot instability and huge volatility, dropping from the highest price ever seen for a U.S. average price for the 2012 crop. The decrease could be the largest seen for the 2013 crop. Anything that tends to moderate prices a bit for the 2012 crop probably support later on.
“I don’t think that’s an advocacy position but is something that’s an unintended consequence.”
With a “fixed demand like the RFS, it’s inflexible, inelastic,” said Tyner. “When you have a severe shock that means other sectors have to do most of the adjustment.
“The design of the system – having to carry forward RINs – will be a really good feature moving forward. The possibility of a partial waiver could be good if, and only if, we determine that there’s refining and blending flexibility.”
Arguments in favor of an RFS waiver assume there will be an automatic reduction in the demand for corn. That isn’t a given, said Tyner. What if a waiver “becomes a party nobody attends” because the ethanol industry “either cannot or chooses not to for legitimate economic (reasons) not to adjust? We’ll have created expectations that adjustment will occur and it doesn’t happen – that could be disruptive.”
Tyner also worried about setting precedent while the fledgling cellulosic biofuel remains on shaky legs. “It’s very difficult to get investment today for cellulosic biofuels because of a wide range of uncertainties.” Adding the uncertainty of such waivers “makes it even more precarious.”
What about importing ethanol?
Another option open to the EPA is to waive the RFS for “other advanced biofuels,” which includes sugarcane-based ethanol. That amounts to 750 million gallons (equivalent to some 275 million bushels of corn) in 2013.
“If that were waived,” said Tyner, “then all the sugarcane ethanol would, in essence, substitute for corn ethanol. It would bring about, through market forces, a likely reduction in corn ethanol.”
The impact of an RFS waiver on dried distiller’s grains (DDG) and soybean meal prices?
Hurt said from a bushel of corn that goes to ethanol, roughly a third, (about 18 pounds of a 56-pounds bushel) is left for feed.
“We see a very strong relationship between the corn price and (DDG) prices,” said Hurt. “I think if … a waiver reduced the amount of corn that went to ethanol, we’d see a lowering of the corn price and a lowering of the (DDG) price.”
Potential impacts on food prices at the grocery store?
The drought, said Hurt, “has caused the economic losses. The distribution of that loss is going to essentially be passed to consumers of food and fuel products, not only in this country … but to the world.”
The USDA predicts “something between 3 and 3.5 percent food inflation this year and a 3 to 4 percent increase for next year. There have been three years in a row with food price inflation rate higher than the general inflation also. (It is also) higher than the incomes of producers.”
While wealthier countries can better absorb rising food prices, there has been a run of years “where we’ve seen concerns about world food supplies. Of course, it isn’t just availability but for (those with the) lowest incomes food price increases perhaps push more of those populations into poverty.”
Hurt also warned that, no matter what actions are taken, the consequences of the current drought won’t be over quickly. “There will be implications on the beef side, as an example, right through 2015. The extension of this drought and how it affects our food supply will be with us for several years to come.”
Pointing to the Purdue study and another done by Iowa State University, Bob Dinneen, Renewable Fuels Association President and CEO, said the analyses, “compellingly show that waiving the RFS is unnecessary and would be ineffective in meaningfully reducing corn prices. Congress and EPA built sufficient flexibilities into the RFS to ensure compliance is achievable even under the most abnormal and extreme circumstances, such as this summer’s drought. These studies recognize the impact of that built-in flexibility and show that a waiver would not significantly contribute any additional further relief from drought-induced high corn prices.”