The price of RINs is once again making headlines. As Figure 1 shows, the attention is well-deserved. The price of D4 biodiesel, D5 advanced, and D6 ethanol RINs in the secondary market have once again spiked upwards in rather dramatic fashion. Just two weeks ago D6 RINs were trading at $1.02 per gallon and have since risen to $1.46 per gallon. That is over a 40 percent jump in value in two weeks! We explore in this post what is behind the spiking RINs prices and what this reveals about market expectations regarding the impending collision of the E10 blendwall and RFS biofuels mandates.
We begin by reviewing the analysis found in our April 24, 2013 farmdoc daily post entitled "Is Speculation Driving Up the Price of RINs?" Figure 2 (Figure 5 in the earlier post) is the key. It shows a simple model of supply and demand for the U.S. ethanol market. The model has a vertical (perfectly inelastic) segment at 5 billion gallons in order to represent the demand for ethanol as an MTBE oxygenate replacement. It is vertical since non-ethanol alternatives are prohibitively expensive. The demand curve then becomes flat (perfectly elastic) for ethanol prices equal to 110 percent of CBOB prices between 5 and 13 billion gallons. The demand curve becomes vertical again to reflect the E10 blendwall, which is assumed here to be 13 billion gallons. The red vertical lines represent the renewable (ethanol) RFS mandate for 2011 (12.6 billion gallons) and 2013 (13.8 billion gallons). The 2011 RFS mandate does not cause any problems, even though the equilibrium quantity is stuck at the 10 percent blendwall, because the mandate is less than the blendwall. An entirely different situation is presented in 2013. Now the RFS mandate exceeds the 10 percent blendwall quantity of 13 billion gallons. If a stock of D6 or higher-nested RINs is not available to fill in the gap between 13 and 13.8 billion gallons there is no feasible market equilibrium since the RFS requires more gallons to be blended in the motor gasoline pool than is physically possible.
The RFS does have some flexibility built into it, in that it is possible to accumulate RINs stocks and higher nested RINs can be used to meet lower-nested mandates if no stocks of RINs are available for the lower-nested category. If we assume that the stock of D6 ethanol RINs is zero, then compliance for the wedge between 13 and 13.8 billion gallons will simply be transferred to the next higher nested non-ethanol category of the RFS. 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. The EPA has proposed a 2013 biodiesel mandate of 1.28 billion gallons, which would rise to 1.81 billion gallons in this analysis due to the "extra" biodiesel needed to meet the renewable mandate (1.28 + 800/1.5). Of course, we know that in reality there is a large stock of D6 ethanol RINs that can be drawn upon to meet the renewable gap above the blendwall. The key is that our analysis shows the value of the D6 RINs in this stock should be basically equal to the price of D4 biodiesel RINs since in the absence of the stock of D6 RINs the renewable gap would have to be filled by producing and blending biodiesel. We can also show that as long as biodiesel is the marginally most expensive alternative for fulfilling the advanced RFS mandate that the price of a D5 advanced RIN should also equal the price of a D4 biodiesel RIN.