- The Environmental Protection Agency is authorized to waive the national RFS if the agency determines that the mandated biofuel volumes would cause “severe harm” to the economy or the environment.
A cushion of reserve ethanol stocks and “banked credits” amassed by the ethanol industry will allow the industry to cut back on ethanol production to the equivalent of 1.3 billion bushels of corn and still meet the Renewable Fuel Standard in 2012-13, said Renewable Fuels Association’s Geoff Cooper.
This makes a waiver of the RFS unnecessary this year, said Cooper, speaking at a recent RFA webinar.
The Environmental Protection Agency is authorized to waive the national RFS if the agency determines that the mandated biofuel volumes would cause “severe harm” to the economy or the environment. In 2008, EPA turned down a request from Texas for a partial waiver of the standard, noting there was no compelling evidence the RFS was having such an effect.
Here’s more on that decision.
Over the last two months of this year, dry, hot weather in the Midwest has shriveled potential U.S. corn production by an estimated 25 percent, according to USDA’s latest crop assessment. As the crop shrinks and prices rise, a number of trade organizations, governors of several states, as well as members of the House of Representatives have urged the Environmental Protection Agency to waive the mandate for ethanol.
Barry Carpenter, CEO of the North American Meat Association said a waiver is necessary“to ensure an adequate supply of corn for America’s livestock producers and others who put food on the tables of American consumers.”
A waiver request by the National Pork Producers Council (NPPC) and others stated, “The drought-induced reductions in the corn supply mean that the mandated utilization of corn for renewable fuels will so reduce the supply of corn and increase its price, that livestock and poultry producers will be forced to reduce the size of their herds and flocks, causing some to go out of business and jobs to be lost.
“In addition to this direct harm, these herd and flock reductions will ripple through the meat, milk and poultry sectors, causing severe harm in the form of more job and economic losses. This drought-induced harm exists now, will continue to exist into the latter part of 2012 and 2013, and could continue to be felt in 2014 depending on the policy choices made now.”
Cooper, the RFA’s vice president of research and analysis, says flexibility in the ethanol mandate allows the industry to participate in demand rationing, at least for another year. He noted that since early June, the ethanol industry has reduced corn consumption by 12 percent, approximately 1.5 billion gallons of capacity has been idled, and many other plants are operating well below capacity. In addition, ethanol production has fallen to a 2-year low in response to high corn prices, which has pushed ethanol stocks to high levels.
The effect of corn demand rationing in the ethanol industry is on par with that of other end users, according to Cooper. USDA’s August estimate of supply and demand numbers for corn estimated a 13 percent reduction in seed and residual use, a 13 percent reduction in distillers grains, an 8 percent reduction in ethanol production, a 19 percent reduction in exports and a 5 percent reduction in food, seed and industrial use.
Cooper noted that if the ethanol market does get tight, refiners will draw on stocks first. If they become short on physical gallons, refiners can use excess or “banked credits,” which are known as RINs (renewable identification numbers) for compliance. Refiners can meet as much as 20 percent of their obligation using RINs generated in the previous year, which for last year is equivalent to 1 billion bushels of corn. If the refiner is short on physical gallons and RINs, the refiner can carry the compliance deficit forward one year.
Cooper said a waiver could “send a chilling signal” to advanced biofuel investors, slow commercial roll-out of E-15 and would be a disincentive to farmers to plant corn in 2013. “There are a lot of investors on the sidelines today who are waiting and watching to see what EPA is going to do with the RFS, and if it will cave in to the pressure.”
In its waiver request to EPA, the NPPC said research from professor Bruce Babcock at Iowa State University indicated that a waiver of the RFS in 2011 would have reduced the price of a bushel of corn by $1.48.
Also citing Babcock’s research, Cooper said a waiver of the mandate “would have little impact on corn price above and beyond what is already coming from these flexibilities in the standard.”
Cooper said Babcock’s research indicates that a complete waiver would result in a 4.5 percent decrease in corn prices, or a 28-cent per bushel reduction. “That’s not the type of relief that the livestock folks are seeking, nor the type of impact they claim will happen,” Cooper said.
Cooper acknowledges that another low corn production year could remove the current cushion of excess RINs and heavy ethanol stocks. “We can get through 2013 and meet the RFS of 13.8 billion gallons without much of a problem. We can produce as much as 11.8 billion gallons of ethanol in 2013 and still meet the requirements.
“If we do encounter a situation that would put strain on the corn and ethanol markets (in the next production year), we would need to sit down with EPA and other stakeholders and figure out the best course forward. But assuming this is a one year deal, we have the flexibility to get through.”