INSIGHT: US politicians and ethanol groups bicker over RFS

02 August 2012 23:26  [Source: ICIS news]

By Brian Balboa

HOUSTON (ICIS)--The US ethanol industry and ethanol market participants have come out in full force this week against recent moves in Washington to adjust the country’s ethanol fuel mandate. The move by politicians comes as severe drought conditions have hurt corn crop estimates, driving prices to record highs, which have also in turn trickled down to US ethanol prices.

This week, crop quality ratings released by the US Department of Agriculture (USDA) indicated as of 29 July, 21% of the corn planted in the 18 top-producing states was rated in good condition while 3% was rated as excellent, compared with ratings of 23% good and 3% excellent a week earlier.

US growers this year have planted 96.4m acres (39.0m hectares) of corn and expected to harvest 88.9m acres, up 6% from last year, according to USDA estimates.

Despite an expected 6% increase from last year, a coalition of US meat and poultry groups have asked the Environmental Protection Agency (EPA) to waive the federal mandate for corn-based ethanol in gasoline, citing the extreme drought conditions.

The coalition said it asked for a waiver “in whole or in substantial part” of the amount of renewable fuel that must be produced under the Renewable Fuels Standard (RFS) for the remainder of this year and for the portion of 2013 that is one year from the time the waiver becomes effective.

The RFS requires 13.2bn gallons of corn-based ethanol to be produced in 2012 and 13.8bn gallons in 2013.

The coalition said some agricultural forecasters estimate that just 11.8bn bushels of corn will be harvested this year, compared with about 13bn that were harvested last year.

Under those conditions, corn-ethanol production will use about four of every 10 bushels, the coalition said.

Members of the US Congress have also joined the fray by asking Environmental Protection Agency (EPA) administrator Lisa Jackson to temporarily reduce the amount of corn ethanol that gets blended into gasoline under the RFS.

Led by representatives Bob Goodlatte (Republican-Virginia.), Steve Womack (Republican-Arkansas.) and Mike McIntyre (Democrat-North Carolina), the congressional members sent a letter to the Jackson this week that says meeting this year’s mandate for corn ethanol production will tighten corn supplies for livestock producers, as drought conditions have hurt farm productions.

The move by the members of Congress comes a week after US Senator Ben Cardin (Democrat-Maryland) unveiled details of a bill that he says would link the country’s corn ethanol fuel mandate to the amount of US corn supplies. 

Cardin said his “RFS Flexibility Act” creates a process so that the government could lessen the RFS mandate for corn ethanol when the US Department of Agriculture (USDA) reports on US corn supplies towards the end of each year, based upon the ratio of corn stocks-to-expected use, according to a press release by Cardin’s office.

“Domestic food production is reaching a state of crisis driven by the increasing cost of inputs, like corn, so that poultry and other food producers have to compete with industries that are operating with under unfair government ethanol production mandates,” Cardin said.

Under Cardin’s bill, the administrator of the Environmental Protection Agency (EPA) would review the current corn crop year’s ratio of US corn stocks-to-use ratio in making a determination of the RFS.      

The EPA would provide a waiver for the RFS for the following calendar year if the stocks-to-use ratio was under a certain level.

However, industry groups have said waiving or reducing US Renewable Fuel Standard (RFS) requirements would not alleviate corn prices.

The Renewable Fuels Association (RFA), a corn ethanol production trade group, opposes a waiver.

“Now is not the time to implement knee-jerk reactions that arbitrarily reduce RFS requirements based on historically variable corn supply estimates or waive portions of the RFS,” said RFA spokesperson Matt Hartwig in late July. “Such actions would likely do more to disrupt the fuel market than alleviate concerns over high corn prices.”

Meanwhile, the Center for Agriculture and Rural Development (CARD) at Iowa State University suggested in a study released last week that adjustments to the RFS would have a minimal impact.

The study analysed 500 different scenarios assuming varying levels of corn yield this year, finding that a total waiver of the RFS would reduce corn prices less than 5% and cause less than a 5% reduction in ethanol production.

And this week, RFA president and CEO Bob Dinneen said calls by the livestock lobby, oil industry or their allies in Congress to waive any or all of the fuels standard are not only premature, but void of justification.

“The RFS contains a great deal of flexibility allowing obligated parties to meet RFS requirements in a variety of ways other than blending physical gallons of ethanol,” Dinneen said. “The market is taking advantage of this flexibility as domestic ethanol demand for corn has fallen nearly 15% and production has dropped in the last six weeks.  Simply put, the RFS is working and knee-jerk reactions to acts of God will not provide the kind of relief some are seeking.”

In addition to trade groups coming out against any adjustment to the mandate, ethanol traders have expressed concern over its potential impact on the market.

“This would be a huge change to the market,” said one US based ethanol trader.

The market source went on the say an adjustment to the RFS would take out many positions held by trade participants, not just in ethanol, but in the Renewable Identification Numbers (RINs) market as well.

RINs serve as credits for the production and blending of renewable fuels and are used for compliance purposes under the EPA's Renewable Fuels Standard (RFS) regulations.

One RINs broker suggested that the price for ethanol RINs could drop as a result of any RFS waiver or adjustment.

“If they rein in the demand curve for ethanol, physical prices would fall, making the biofuel a more attractive option than RINs.”

By: Brian Balboa
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