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Thursday, August 16, 2012

Waiving The Renewable Fuels Standard:  Will That Solve The Problem For Livestock Feeders?


The Congress is at loggerheads over nutrition funding in the Farm Bill, but can you imagine the Farm Bill suffering more if the dysfunctional Congress also jumped into the fray over waiving ethanol production requirements as part of the Farm Bill?  Agriculture is politically split about as far as possible currently over whether corn should be re-allocated away from ethanol and toward the livestock industry.  End users say a waiver of the Renewable Fuels Standard will ease the economic pain on livestock feeders and the food industry.  But do the numbers justify that? 

The National Corn Growers was among the initial proponents of ethanol in an effort to find a new market for corn.  There was slow growth in consumption for 20 years until the Congress approved the Renewable Fuels Standard that established benchmarks for the amount of ethanol to be produced and blended into the nation’s motor fuel supply.  With a goal of 15 billion gallons by 2015 that would be a new market for nearly 5 billion bushels of corn, and while that was welcome news for a bumper crop, it has become controversial at a time when the corn crop is faltering from the drought and livestock feeders are chasing minimal stocks of corn.  


The Renewable Fuels Standard (RFS) has become a target for many opponents, particularly those who need corn.  Among their arguments:

  • “The ethanol industry won’t share in demand rationing because of the RFS.”
  • “The RFS is an inflexible, inelastic demand driver that will suck up 5 b. bu. of corn no matter what.”
  • “The ethanol industry is insulated from the effects of high corn prices because of the RFS.”
  • “Waiving the RFS would ‘free up’ corn and meaningfully reduce feed prices.”
  • “The RFS is driving up food prices.”
  • “The RFS is causing higher gas prices.”


In recent weeks there has been a series of academic studies looking at the RFS, and whether any waiver of its requirements to add corn-based ethanol to US motor fuel would relieve the financial impact on other corn end users, particularly the livestock producer.  University of Illinois economists Darrel Good and Scott Irwin conclude, “The EPA does not necessarily have the ability to substantially ease the plight of livestock producers in 2012-13 at the stroke of a pen. Waiving the RFS mandate for ethanol may have a smaller impact on the price of corn or the quantity of corn available for feed than many expect. This conclusion is consistent with a recent Iowa State University Studythat estimated the price of corn would drop an average of only 28 cents across a range of corn yield outcomes due to a full waiver of the mandate. Without large changes in the economic incentives to blend ethanol with conventional gasoline, at least in theory, the price of corn and availability of corn for feed may be unaffected.”


The Bruce Babcock Study at Iowa State indicates, “The 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 $2.49 per bushel to $0.58 per bushel. This means that waiving would lower corn prices by about 7.4 percent.”  And Babcock adds, “The results of this analysis cannot be interpreted as concluding that ethanol production has no impact on corn prices. If US ethanol consumption were somehow banned, then US corn prices would drop to an average of $2.67 per bushel. But there is no mechanism for implementing a ban on corn ethanol production. The only tool that the US government has at its disposal to lower corn prices is to waive the mandate.”


Purdue University ag economists Wally Tyner, Chris Hurt and Farzad Taheripour studied the impact of a partial waiver of the RFS within the context of the drought, and how a waiver would affect corn supply and price.  They say, “The bottom line: if refineries and blenders have flexibility to reduce ethanol usage in the short term, use of prior blending RINs credits and/or a waiver could reduce corn price around $1.30/bu for a large waiver or $0.47/bu. for a modest waiver.”


How does the Tyner study at Purdue differ from the Babcock study at Iowa State?  Tyner says of Babcock, “His analysis gets a difference in corn price between the full mandate and the flexible mandate cases of $0.91/bu. for the 2.4 billion gallons use of RINs (production credits)—similar to this paper’s analysis of $0.67/bu. for a 2 billion gallon RIN usage.  Going from the flexible mandate case to no mandate yields another $0.28/bu. price reduction in Babcock’s analyses. This result is driven by the assumed shape of the demand curve for ethanol.”


And how does the Tyner study at Purdue differ from the Good and Irwin study at the University of Illinois.  Tyner says of Good and Irwin, “They simply argue that the use of carry-forward RINs (production credits) would be enough to reach the perfectly elastic portion of the demand curve, so a waiver would have no impact on corn price. Their assumption is equivalent to that of this paper’s no flexibility case, which projects zero impact. However, the degree of refiner and blender flexibility if a waiver were issued is unknown. Unlike the Irwin/Good paper, the Purdue paper argues there is limited flexibility to adjust to lower corn use for ethanol in the short-run, i.e. 2012, but there could be some reduction in corn use below the blend wall over the entire September 2012 through August 2013 marketing year.”


On behalf of the Renewable Fuels Association, its economist Geoff Cooper assembled a summary of the numbers that argue against any waiver of the RFS.  He prepared a series of charts for a webinar on August 14 and contends a waiver of the RFS is not necessary because the corn supply and price has idled 26 plants and production reduced by 12%.  The ethanol industry also says ethanol exports are down and imports are up as a result of the corn economy, and that the EPA requirements will be met with the help of stocks and production credits.  That will be done with only a 3.571 bil. bu. demand for corn, not the 4.857 bil. bu. that would have been used without the emergency measures.  The Renewable Fuels Association also says any waiver would have little impact on corn prices.  The RFA cites data by Bruce Babcock of Iowa State University that says there would only be a 4.6% decline in corn prices with a complete waiver of the Renewable Fuels Standard.



While the livestock industry may not be thrilled with the outcome, the ag economists at Cornbelt Land Grant Universities have generally concluded that any EPA action to waive the Renewable Fuel Standard, either fully or partially will not have any substantial impact on the price of corn.    

Posted by Stu Ellis on 08/16 at 11:09 PM | Permalink


Why is the discussion based only on the price of corn? What about the fact that our Ethanol policy is a bad one for the taxpayers, consumers, and the environment? There is little wonder why we are still in a recession when families expendable income is being taxed by higher food bills at the grocery store. Chris- Sorry for the tech issue in getting your comment posted. At issue now is the availability of corn, which has a price function to it. Everyone is entitled to their opinion, but we have a pro-ethanol policy for environmental and supply reasons, and the ethanol subsidies were removed last December, so taxpayers do not have the $5 billion subsidy. ~Stu

Posted by: Chris Green at August 25, 2012 11:11AM

Stu: With all due respect... mandating that 14 billion gallons of ethanol be brewed up is a subsidy. A very large subsidy. How ethanol production helps the environment? Chris: I think the corn and ethanol folks have indeed worked hard to develop a market, and they have certainly benefited from the public policy that resulted in the RFS. It is not the first time an industry group went to Congress for assistance, but in this case Congress opted for the program that not only has an economic benefit, but also provides a non-carcinogenic oxygenate for gasoline. The ethanol industry has also suggested that its product has replaced 14 billion gallons of imported oil annually, which many folks believe is beneficial. ~Stu

Posted by: Chris Green at August 27, 2012 6:06AM

If ethanol could stand on it's own in the free market it would not need a mandate. Congress is corrupt, and that is why we are trillions of dollars in debt. The corn farmers may get away with gouging what's left of the middle class with their higher corn earnings, but when the middle class disappears, they will be working for the govt. directly, and lose their freedom. It's really a rather sick economic game. I note you say the ethanol industry suggested... that is because you do not want to own their lies, and I salute you for it.... If every one inflated their tires correctly it would replace what ever is supposedly saved by ethanol.. which is a cruel joke because you get less gas mileage from it. Wake up Amuurica!

Posted by: Chris Green at August 27, 2012 9:09PM

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