RFS gambit heaps uncertainty on market

RFS gambit heaps uncertainty on market

Proposed reduction in federal ethanol mandate could mean fewer bushels of corn will be needed to process biofuels over next few years.

RFS gambit heaps uncertainty on market
ETHANOL, in some circles, is a four-letter word. Ask most livestock feeders or petroleum marketers their feelings on renewable fuels, and you're likely to get a colorful earful.

Any way you slice it, ethanol production mandated by the federal renewable fuel standard (RFS) has been a significant boon to certain sectors of the agricultural economy, most obviously corn growers and ethanol refiners.

Last week's news that the Environmental Protection Agency was proposing what amounted to an 800,000 gal. per year reduction in the mandate for corn-based ethanol drew praise from ethanol's critics and stern words from the industry.

Most important, perhaps, the proposal injected some measure of uncertainty into a market that had grown fairly comfortable measuring the volume of corn needed to achieve the production levels demanded by the RFS.

"That has created a fairly narrow band of uncertainty surrounding 460 million gal. of the 15.21 billion gal. proposed mandate, consisting of 180 million gal. of expected E85 use and 280 million gal. of non-biodiesel advanced biofuels," U.S. Department of Agriculture economists Seth Meyer and Rob Johansson said. "Depending on the actual level of the blend wall, the potential for sugarcane ethanol imports from Brazil could be significantly reduced, the potential (amount of) corn for ethanol could be further reduced beyond the volume already implied by reducing the overall mandate and the potential role of biodiesel blending to meet the RFS mandates in 2014 could expand."

Based on the Nov. 8 "World Agricultural Supply & Demand Estimates" from USDA, an estimated 4.648 billion bu. of corn were used to produce ethanol and co-products during the 2012-13 marketing year, down 352 million bu. from the previous marketing year. Domestic ethanol production dipped from an estimated 13.796 billion gal. in 2011-12 to an estimated 12.899 billion last year.

"Much has been made of the recent surge in domestic ethanol production and the reopening of some ethanol plants," said University of Illinois economist Darrel Good. "Based on weekly estimates from the Energy Information Administration (EIA), ethanol production in the first two months of the 2013-14 marketing year of 2.226 billion gal. was about 7.5% larger than production during the first two months of the 2012-13 marketing year."

However, Good cautioned that such an increase may not imply any substantial increase in domestic ethanol consumption but, rather, may be an indication of net trade and stock levels changing.

"Imports totaled only 23.5 million gal. in September and were zero in October," he explained. "Export estimates for those two months are not yet available but would have totaled about 100 million gal. if the August pace was maintained."

Ethanol production in recent weeks has averaged more than 900,000 barrels per day, according to EIA data, with zero imports for seven weeks running as of Nov. 15 (Figure 1).

Based on the proposed changes to the RFS, Good said it is possible that domestic consumption could be less than 13 billion gal. if obligated parties choose to use more of the renewable identification numbers that they have stockpiled rather than actually blending more ethanol.

Purdue University economist Wally Tyner said the EPA proposal will stymie biofuel growth and destroy current incentives to blend larger volumes of ethanol such as for E85 fuel.

"I think it is a mistake to put the RFS that low," said Tyner, who recommended that the corn-based ethanol requirement of the RFS be set at 13.9 billion gal. to provide an incentive for refiners to blend and sell more E85 fuel, a mixture of 85% ethanol and gasoline that can be used only in "flex-fuel" cars.

Tyner said that level would not put undue pressure on corn prices.

According to the Renewable Fuels Assn., citing Iowa State University data, the proposal will cause a 19 cents/bu. drop in corn prices, equating to a loss of $2.7 billion to the corn industry. Based on current breakeven prices from the University of Illinois, the Iowa State projection of $4.35/bu. corn would mean a corn price below the cost of production (Figure 2).

EPA will be receiving comments on its RFS proposal. Based on past history and the parties involved, the agency should expect to get quite an earful.

Volume:85 Issue:48

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