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Sunday, July 21, 2013

RINsanity: Knowing just a bit more about ethanol’s contribution to corn values


If you grow corn, you know more about ethanol than the prior generation.  But your knowledge of how ethanol is priced will not be as deep as the next generation.  Because ethanol has been driving the price of corn for the past several years, your knowledge of the ethanol economy should be taken to the next level.  That is because corn growers may have to fight harder to maintain the status quo, if they want to keep ethanol as a market for 5 billion bushels of corn.  First lesson:  RINs.


RIN:  Renewable Identification Number, a 38 digit code assigned to every gallon of ethanol refined.  A RIN is assigned by the Environmental Protection Agency as part of its task of administering the Renewable Fuel Standard (RFS) that says 10% of the motor fuel supply should be ethanol.  And a RIN is part of that mechanism.


University of Illinois ag economist Nick Paulson explains that a RIN is created when ethanol is refined and the RIN follows the ethanol through its marketing and use, “When the ethanol is blended the RIN is then separated from the fuel and can be 1) applied immediately towards the obligated party's mandate for the current year (or applied to the previous year's mandate if the obligated party had borrowed in the previous period), 2) held or banked by the obligated party for future trading or application toward their mandate in the following year, or 3) traded/sold to another obligated party or a speculative RIN trader.”

RINs have been in the headlines lately, and that may have been your first awareness of their existence.  RINS have a value and they have been worth 1-4¢ per gallon since the inception of the RFS, since sometimes they are bought and sold by fuel blenders, ethanol refiners, and lately by speculators since they have recently become a traded commodity on the New York Mercantile Exchange (NYMEX).  That trading process since May has pushed RIN values to nearly $1.50 per gallon of ethanol.  And the fuel blenders, who have to purchase them, are not happy and complained last week to Congress, pleading for changes in the RFS, since the RIN mechanism was “broken.”   Whether or not the RIN process is broken, the plea by oil companies to change the RFS should be a call to arms for the corn and ethanol industries.


Now that RINs has been put in perspective, let’s look at “RINsanity” as the market has recently termed the explosive value of RINs.  University of Illinois ag economists Scott Irwin and Darrel Good this spring have published a series of pieces  in FarmDocDaily, looking at ethanol and all of the economic issues surrounding it.  Their recent perspective on the reason for the wild pricing of RINs provides a surprise ending that ethanol advocates may not have seen coming.


Their pricing chart depicts the value of RINs for D6 ethanol (corn-based), D5 advanced (switchgrass-type) ethanol, and D4 biodiesel (soybean oil). While prices have been volatile for blenders wanting biodiesel and advanced biofuels, the price of RINs for corn ethanol was static until March and has exploded upward since that time to the high of $1.465 on July 19. Much of the volatility has resulted from ethanol reaching its 10% blend wall, in which 13 billion gallons were blended into 130 billion gallons of motor fuel. Petroleum companies need RINs to demonstrate compliance with the RFS, but they are not available due to the maximum amount of ethanol being produced.


Subsequently, Irwin and Good say the RFS allows RINs of advanced fuels and biodiesel to be acquired by blenders to replace the unavailable RINs from corn ethanol, “At the present time biodiesel is the only higher nested non-ethanol type of biofuel that is potentially available in large quantities. So, in this framework the 800 million gallons of the renewable mandate above the E10 blendwall are effectively converted into an additional biodiesel mandate over and above the existing biofuel mandate.”   


Consequently, the economists say that the margins received by biodiesel blenders have determined the value of a RIN for ethanol, “Biodiesel blending margins are the major determinant of D4 RINs prices. This is especially revealing as we consider the recent spike in D4 prices. Basically, D4 prices have closely tracked the rise in biodiesel blending margins.”  And they subsequently ask rhetorically, what is causing the blending margins for biodiesel to expand significantly:  “Biodiesel prices have been on a tear since the beginning of the year, with prices increasing from about $4 per gallon to as high as $5.30 per gallon in recent days. This has occurred at the same time that diesel prices have essentially remained flat, which means that the wedge between biodiesel and diesel prices has increased sharply since the first of the year. This has in turn been the driving force behind the increase in D4 biodiesel RINs prices.”


Who would have guessed that profits being made by companies blending biodiesel would have an impact on the cost of RINs and the cost of oil companies complying with the Renewable Fuels Standard in blending standard ethanol? 



Renewable Identification Numbers track the movement of ethanol and guarantee that fuel blenders are complying with the Renewable Fuels Standard.  But like the underlying commodity, ethanol, RINs also have a value and that value has risen explosively in recent months.  Part of the reason is the fact that the maximum amount of ethanol is now being blended into the fuel supply.  In conjunction with that fact, the lack of available RINs has caused the demand to be replaced by RINs assigned to biodiesel blending.  And recently blending margins have increased significantly, while diesel prices have remained steady.



Posted by Stu Ellis on 07/21 at 09:39 PM | Permalink


Once again consumers and taxpayers are forced to pay what is an enormous cost for what amounts to 200,000 to 300,000 barrels (petroleum equivalent) a day of ethanol blended into gasoline or a fly speck of supply in a world oil market of 90 million barrels per day. This is a multitrillion dollar forced collection(welfare for corn/soybean farmers and farmland owners) from the 315 million US consumers and taxpayers mainly to the large corn/soybean farms in ten Midwestern states estimated at about 70,000 farmers.-------------Ken, I am not sure about all of that. Ethanol tax credits are gone. Tariffs are gone. If ethanol was not in the fuel supply, we would be sending 10% more of our dollars abroad to make the Shieks more wealthy. And with corn prices headed toward $4 and maybe $3 over the next couple years, I am not sure one could say ethanol is providing welfare to farmers. ~Stu

Posted by: Ken Glozer at July 23, 2013 10:10AM

Without a doubt, rising RIN prices have pushed physical biodiesel prices higher - not the other way around.

Posted by: Brian at July 27, 2013 2:02PM

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