AS the debate over the renewable fuel standard's (RFS) ethanol mandate rages on in Washington, D.C., others pondered the bigger question: What does any change in the mandate mean for corn usage and prices?
According to analysts, the proposed change to the RFS released by the Environmental Protection Agency is unlikely to make much difference to the market.
EPA proposed to write down the ethanol mandate from 14.4 billion to 13.0 billion gal. of ethanol for 2014 and 2015, a much larger reduction than the industry had anticipated. According to the agency, the goal of the proposal is "to put the RFS program on a steady path forward" by ensuring the continued growth of renewable fuels while recognizing "the practical limits on ethanol blending," or what is typically called the "blend wall."
The proposal represents a reversal in the methodology EPA has used to calculate the RFS mandate each year, starting with the E10 blend wall as the base point and then calculating other ethanol categories (advanced, cellulosic, etc.) from there. In the past, EPA started with the total renewable fuel volume mandated by statute and then worked backward.
EPA's proposal has drawn no shortage of controversy, with the ethanol industry claiming that the agency lacks the legal authority to buck the will of Congress when it passed the RFS and with the petroleum and livestock industries more than pleased with the likelihood of EPA putting a lid on corn-based ethanol.
However, according to University of Illinois economists Darrel Good and Scott Irwin, the proposal does little to change the underlying fundamentals of the ethanol market, at least in terms of the minimum volume of corn likely to be processed as renewable fuel.
"While there is little upside potential to corn use for ethanol due to the E10 blend wall and small growth in E85 use, there is also little downside risk to corn use below 4.8 billion bu. per year in 2014 and 2015," they wrote in an analysis last week. "By historical standards, this is a very high floor on corn use for ethanol. So long as ethanol blending margins remain strongly positive, there also is little incentive to use RINs (renewable identification numbers) in place of physical ethanol blending."
Overall, they concluded, the implications of the proposal are generally market-neutral for corn.
On the other hand, if EPA's proposal does not come to pass, either because the agency makes a change prior to implementing a final rule or because the rule is overturned later, the scenario will be much different.
"If the EPA rules are eventually overturned, then blend wall problems will return in short order, RIN stocks will likely be exhausted by the end of 2014, RIN prices will soar once again and pressure on the grain and oilseed markets will, in all likelihood, resume," Good and Irwin said. "Much hangs in the balance on the outcome."
The implications go beyond the corn market, of course. A new report from CoBank last week concluded that the proposal signaled to fuel retailers that investments in higher-blend ethanol infrastructure — tanks and pumps capable of handling E85, for example — are not necessary.
Report author Dan Kowalski said the proposal marked the first time since the RFS was created in 2005 that the total corn-based ethanol mandate could be reduced.
Refiners are currently producing ethanol at a very strong pace, averaging 944,000 barrels per day for the week ending Dec. 6, according to Energy Information Administration data. Output that week represented the strongest pace of the year and the largest output since the first week of 2012.
According to Geoff Cooper with the Renewable Fuels Assn., the four-week average for ethanol production stood at 922,000 barrels per day last week, representing at least a 16% higher annualized rate of production from January.
Ethanol production represented 11.31% of daily gasoline demand last week, the highest rate of the year and the highest since February 2012 (Figure). Ethanol producers were using 14.313 million bu. of corn per day last week, returning 93,923 metric tons as distillers grains.
Analysts said ethanol producers are now reaping the best profit margins they've seen in five years, given strong demand and much cheaper corn. Distillers grain exports and record ethanol demand have added a good deal to the top line, and corn prices nearing three-year lows have made for a much more attractive bottom line.