DEPENDING on which side of the "food versus fuel" debate one stands, the renewable fuel standard (RFS) is either an inspired piece of legislation or the worst policy debacle in a generation.
Either way, it is clear that establishing the RFS in 2005 sparked a new era in agriculture and biofuel production.
As drought intensified last summer, RFS opponents -- as numerous and as critical as ever -- renewed calls for a wholesale repeal (or at least a temporary waiver) of the RFS mandate. While the Environmental Protection Agency declined to alter the standard, economists and market analysts have continued to evaluate the RFS and what it means for the grain and livestock markets.
Over the past 16 weeks, ethanol production has averaged roughly 813,000 barrels per day, and last week's production rate of 784,000 barrels per day was roughly unchanged from the start of that three-month period.
The data show that ethanol production tapered off as corn prices escalated in the latter half of the year. At the same time, imports of ethanol, which were almost nonexistent in the first half of the year, picked up significantly as U.S. plants idled or closed.
That tells only part of the story, of course, as the data also reveal that gasoline demand trended lower in the latter half of the year. At 10.31%, ethanol production as a percentage of gasoline demand hit a six-month peak in the week ending Jan. 4 as stocks hit their lowest point in four weeks at 19.9 million barrels (Figure).
Refiner/blender input of ethanol, hitting 714,000 barrels per day that week, was at its lowest point since the Energy Information Administration began tracking weekly production data in June 2010.
Bruce Babcock, a biofuel analyst at Iowa State University's Center for Agricultural & Rural Development, noted that the U.S. ethanol industry faces "numerous challenges" over the next two years.
"The 2012 drought increased corn prices, so profit margins will be low until at least the 2013 corn crops are harvested," he wrote in a policy brief last week. "A saturated ethanol market means that ethanol mandates that are scheduled to be implemented in the next two years can possibly be met only if ethanol prices are heavily discounted."
Of course, this means that profit margins would be squeezed even further after the next corn harvest.
Babcock estimated that because of the "blend wall" for 10% ethanol fuel blends, buyers of ethanol will use a significant portion of their banked credits under the RFS -- those renewable identification numbers (RINs) earned for previous gallons of ethanol blended -- over the course of the next year.
"If, as seems likely, imported sugarcane ethanol is used to meet the portion of the advanced biofuels mandate that is not met by biodiesel meeting its own mandate, then almost all the banked RINs should be used in 2013," Babcock said.
The economist's mention of biodiesel is not incidental as the situation regarding the profitability of corn-based ethanol production and the RFS could well lead to growth in the biodiesel sector.
University of Illinois agricultural economists Scott Irwin and Darrel Good explained in a separate analysis that while it might be tempting to conclude that the "new era" sparked by biofuel production is coming to an end, the opposite may, in fact, be true.
"It actually appears that the new era of higher crop prices could be extended well into the future as a result of the RFS for advanced biofuels that, in all likelihood, can only be met with a rapid expansion in biodiesel production," Irwin and Good said.
Their analysis suggested a clear economic advantage to domestic biodiesel production versus imported sugarcane-based ethanol from Brazil in meeting the advanced biofuel mandate of the RFS.
"The biodiesel advantage is large," they explained. "It also has potentially far-reaching implications for both U.S. corn and domestic fats and oils consumption in 2013."
The reinstatement of the biofuel tax credit, they concluded, changed the basic market realities for the biofuel and petroleum industries and made importing Brazilian ethanol much less attractive.