After a coalition of livestock and poultry groups announced their plans to seek a waiver of the Renewable Fuel Standard (RFS), the Renewable Fuels Association (RFA) said that it
would not result in any meaningful impacts on corn prices. “We fully expect Administrator Jackson to deny any waiver request,” said Bob Dinneen, RFA president and chief executive officer. “A dispassionate review of the facts can lead to only one conclusion: a waiver of the RFS would simply reward oil companies that have long sought to repeal this very important and successful program.”
“This summer’s hot, dry weather conditions have caused significant challenges for all users of grain,” Dinneen said. “We understand the hardships facing the agriculture industry this summer are serious. From extremely poor pasture conditions to heat stress on animals to reduced crop yield potential, this summer’s circumstances have been difficult. However, waiving the RFS won’t bring the type of relief the livestock groups are seeking, nor will it result in significantly lower feed prices. In fact, because ethanol plants also produce a high protein feed, limiting ethanol production will only further complicate drought related feed issues and costs.”
“The marketplace is the most efficient mechanism to ration demand, not the government, and that is already happening,” Dinneen said pointing out that the ethanol industry has already begun to respond to sharply higher corn prices by significantly reducing production. The industry’s consumption of corn last week was the lowest in over two years and down nearly 14 percent in just the last six weeks, according to RFA.
Still, despite the downturn in production and continued demand rationing by the ethanol industry, obligated parties (petroleum refiners and blenders) should have no problem meeting the RFS. The ability of obligated parties to “bank” excess Renewable Identification Number (RIN) credits and use them for compliance in the following year provides a significant measure of flexibility that takes pressure off of the corn market in the event of a short crop. 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.
The program’s flexibility also means that waiving the RFS would not have a meaningful impact on corn prices. A recent analysis by Professor Bruce Babcock at Iowa State University simulated the corn price impacts of a 100% waiver of the RFS during the upcoming 2012/13 corn marketing year, finding that a waiver might result in only a 4.6% reduction in corn prices.
Professor Babcock concluded that, “The desire by livestock groups to see additional flexibility in ethanol mandates may not result in as large a drop in feed costs as hoped.” He further found, “…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.”
In addition to the excess RINs available, it is important to note that ethanol stocks remain robust, and gasoline blenders can draw on those stocks to help meet demand in the event production is curtailed. Ethanol stocks currently stand at 800 million gallons. Moreover, ethanol exports—which reached record levels in 2011—are slowing dramatically to compensate for current market conditions.