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Waiving renewable fuel standards: Would it lower feed costs?

Kelli Boylen Published on 19 September 2012

It’s no secret that corn supplies will be low this year – and tensions are running high on what to do about it.

Numerous organizations have signed on to a petition presented to EPA Administrator Lisa P. Jackson asking for a waiver of the Renewable Fuel Standards (RFS) to reduce the ethanol industry’s demand for corn and, therefore, increase the amount of corn available to the farmers and livestock who need it.

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The petition for a waiver states, “Both of these primary feed sources (corn and soybean meal) have been greatly affected by the continuing drought. For those who produce pork, beef, milk and poultry, this represents a dire outcome.

Prices for feed have risen substantially and will likely rise further. In some regions, feed availability will be substantially disrupted, forcing long-distance shipping and challenges in financing its acquisition.”

The petition cites a 2010 report from the Center for Agricultural and Rural Development at Iowa State University (Costs and Benefits to Taxpayers, Consumers and Producers from U.S. Ethanol Policies by Dr. Bruce A. Babcock) focusing on costs and benefits of current U.S. ethanol policies stating, “… if all other federal policies affecting ethanol in 2011 had remained the same, a waiver of the RFS in that year would have reduced the price of a bushel of corn by $1.48.”

As good as that may sound, new information contradicts that number.

Babcock and the Center for Agricultural and Rural Development issued a new report in July of 2012 (Preliminary Assessment of the Drought’s Impacts on Crop Prices and Biofuel Production) which states, “… flexibility built into the Renewable Fuels Standard allowing obligated parties to carry over blending credits (RINs) from previous years significantly lowers the economic impacts of a short crop because it introduces flexibility into the mandate. The 2.4 billion gallon amount of flexibility assumed in this study lowers the corn price impact of the ethanol mandate in this drought year from $1.19 per bushel to $0.28 per bushel. This means that relaxing the mandate further would have modest impacts on corn prices.”

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According to Renewable Fuel Standards put forth by the EPA, ethanol manufacturers are required to produce a minimum amount of ethanol each year. In recent years, ethanol plants have produced more than required and they are then allowed to “bank” those blending credits (commonly called RINs) to years such as this when the corn supply is low. Therefore, they can produce less ethanol than the standards call for without worrying about penalties.

It is estimated that some 2.4 to 2.6 billion excess renewable fuel RIN credits are currently available to obligated parties, equivalent to nearly 20 percent of this year’s RFS renewable fuel requirement.

Babcock explains the different results of the reports: “The report I did in June 2010-2011 did not take into account excess RINs. It was more of an academic paper that explored the impacts of low corn yields or low gas prices on corn prices and RIN prices. The more recent paper was trying to figure out the actual impacts during the 2012-2013 crop year, so I needed to account for the excess RINs that have been generated by obligated parties.”

The Renewable Fuels Association (RFA), a lobbying group in favor of the RFS, was quick to grasp onto the numbers of the new report. Geoff Cooper, RFA’s vice president of research and analysis, states that a waiver would have only a negligible reduction in corn price because of the use of RINs. He believes a waiver could come back to haunt livestock producers in the future because it would be a “disincentive to farmers to plant corn in 2013.”

He also noted that livestock producers may be negatively impacted by a waiver because production of distillers grain would be reduced and the price would go up.

Joel G. Newman, president and CEO of American Feed Industry Association states, “The utmost concern for all corn and soybean users under this year’s circumstances is not price – rather, it is the fair availability of a very limited crop to all prospective users. The price for all consumers of corn and soybeans will be driven up by the limited crop yields. We simply want all industry segments to have a market-driven allocation of the limited supplies in this tight year, rather than the government mandating that one segment gets their share first while the other segments are left to negotiate for the balance.”

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Cooper argues that ethanol production has already gone down more than 12 percent since June and the ethanol industry is not concerned if standards aren’t met this year because they can use the billions of RINs they have built up for credit.

“Approximately 1.5 billion gallons of capacity have idled,” says Cooper. “Roughly 26 ethanol plants are idle and many other plants are operating well below capacity.”

The American Feed Industry Association has a major role in the petition and dairy-related groups that also believe the standards should be waived include the California Dairy Campaign, Dairy Producers of New Mexico, Dairy Producers of Utah, Idaho Dairymen’s Association, Milk Producers Council, Nevada State Dairy Commission, Northwest Dairy Association, Oregon Dairy Farmers Association, Southeast Milk Inc., United Dairymen of Arizona, Washington State Dairy Federation and Western States Dairy Producers Trade Association. The National Cattlemen’s Beef Association and National Pork Producers Council have also signed on. In mid-August, the governors of Arkansas, Delaware, Maryland and North Carolina also petitioned the EPA to waive the standards.

Proponents say a waiver would make more than five billion bushels of corn available to the marketplace for animal feed, reducing costs and increasing availability.

“Profit margins for dairy producers are already in the red in many cases and the short corn crop resulting from the Midwest drought will only make that situation worse. Surely this is a year to step back from the “food vs. fuel” debate and give our dairy farmers a break,” IDA President Mike Roth said in a recent statement about his organization’s support of the petition.

Cooper counters that Iowa State University estimates if a waiver was put in place, ethanol production would fall by just 300 million gallons (less than 5 percent) in the 2012-2013 corn marketing year. This is the equivalent to 107 million bushels of corn, which is less than 1 percent of the projected crop this year.

He continues, “Even if the entire RFS was waived for 2013, the result would not be meaningfully lower feed costs.” PD

Boylen is a freelancer based in northeast Iowa.

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