Potential Impacts of Waiving Ethanol Blending Rules
In a web conference on Thursday, Aug. 16, three Purdue University economists reported findings of an analysis examining how the 2012 drought in the United States may impact corn and ethanol markets, and how a waiver of the federal ethanol mandate might affect those markets. Farm Foundation, NFP hosted the web conference, in collaboration with the three Purdue University economists who completed the analysis--Wally Tyner, Farzad Taheripour and Christopher Hurt.
READ the Purdue paper: "Potential Impacts of a Partial Waiver of the Ethanol Blending Rules"
VIEW the PowerPoint presentation used in the web conference.
VIEW the archived web conference.
Severe drought has reduced corn production and driven up the price of corn. This comes at a time when corn and soybean stocks are low, the result of steady growth in demand for these commodities. USDA now estimated the corn crop at 10.8 billion bushels, down from its early spring forecast of 14.7 billion bushels. Corn prices have increased to record levels exceeding $8/bushel, putting pressure on beef, dairy, milk and poultry producers. Faced with significantly higher feed costs, livestock producers have asked the U.S. Environmental Protection Agency (EPA) to waive part of the Renewable Fuel Standards (RFS).
The 2012 drought has caused billions of dollars in damage, the Purdue economists noted. In considering a waiver, EPA cannot change the loss but only redistribute it among the affected parties--ethanol producers, livestock producers, corn growers and ultimately domestic and foreign consumers. A waiver of the RFS could, under certain conditions, reduce the demand for corn and, thus, corn prices for livestock producers and other non-ethanol corn buyers. Depending on the scenario, the corn price reduction ranges from zero to $1.30/bushel.
Here are key findings of the Purdue analysis:
- A critical issue is the flexiblity of refiners and blenders to use or to choose not to use ethanol. Depending on that flexiblity, a waiver of the RFS could have very limited impact. It is unclear how quickly the refiners could modify operations away from ethanol use, or if they would want to do for a short-term waiver.
- For each gallon of renewable fuel blended, blenders receive a credit called a Renewable Fuel Identification Number (RIN). If more gallons are blended than required by the RFS, the credits can be carried forward to the next year. There are about 2.6 billion gallons of carry-forward RINs available for use now or in the future. Should blenders opt to use those RINs rather than blend additional ethanol, the result may be lower ethanol production and more ethanol plant closings.
- Depending on the flexibility of refiners and blenders to use ethanol, use of RINs could reduce corn price $0.67/bushel without a waiver.
- If refiners and blenders have flexibility with their use of ethanol, a small waiver could reduce corn prices around $0.47/bushel, while a large waiver could reduce it as much as $1.30/ bushel.
- If corn prices remain in the $8 range and crude oil remains at $100 a barrel or lower, reducing the RFS could reduce the demand for ethanol and, consequently, the demand for corn if refinders and ethanol blenders have flexiblity in their oeprations.
- If crude oil prices exceed $120 a barrel and oil companies continue blending ethanol at current levels, an EPA waiver could have little effect.
- If an RFS waiver resulted in less demand for ethanol, that would, in turn, lead to lower corn prices than would have existed without the waiver, and possibly more ethanol plant closings.
- It is critical that EPA complete a thorough assessment of the diverse issues and implications of a waiver.
One of the questions asked of the presenters was what the unintended consequences might be of a waiver. Here are their responses:
- Making a major change in a set policy opens up the possibility in peoples’ minds that a similar change might be made every time a potential increase in the use of that product, corn in this case, comes up in the future. That is another reason for going at this very carefully and being sure that EPA has complete information, or as complete as you can get, before they make a decision.
- Another unintended consequence is what economists call demand destruction--concern that as the price of corn increases, some end users in the United States as well as around the world are forced to cut back on use. If a year from now, normal production conditions yield a 15 billion bushels corn crop but utilization is 11 billion bushels—the result of usage cutbacks this year—one of the unintended consequences could be a lot of instability and a huge volatility in market prices.
- One unintended consequence may be in the way we are doing this. When you have a fixed demand like a mandate such as the RFS, that means it is inflexibility—inelastic as economists says. A severe shock means other sectors have to do all or most of the adjustment. The design of the system—having the carry forward RINs—will be a good feature moving forward, and the possibility of a partial waiver could be useful if and only if, we determine there is refining and blending flexibility.
- Many news reports—the Secretary General of the Food and Agriculture Organization and New York Times editorials, for example—say that with the stroke of the pen, EPA could reduce demand for corn for ethanol. What if that is not true? What if [EPA] issues a waiver and it becomes a party that nobody attends in the sense that the industry either cannot or chooses—for legitimate economic reasons—not to adjust? Then we will have created expectations that adjustments will occur and they won’t happen. That also can be disruptive.
- Another possible unintended consequence of a waiver concerns the longer term alternative cellulosic biofuels. If EPA does issue a waiver, it would need to try to insure that it doesn’t set a precedent. It is very difficult to get investment today for cellulosic biofuels because of a wide range of uncertainties. If you add government policy uncertainty to that, it makes it even more precarious.
The RFS mandates 13.2 billion gallons of ethanol be blended with gasoline in 2012; that number increases to 13.8 billion gallons in 2013.
“As was the case in 2008, when rhetoric in the food-versus-fuel debate rose with the prices of corn and oil, the drought and high temperatures of 2012 are pushing corn and soybean prices to record levels, and the food vs. fuel debate is once again heated,” says Farm Foundation, NFP President Neil Conklin. “Now, as then, Farm Foundation and Purdue University are not about fueling these fires. Our shared mission is to be a catalyst for sound public policy by providing objective information to foster deeper understanding of the complex issues before our food and agriculture system today.”
The Purdue economists' analysis describes the complex economics of corn and ethanol markets, and provides a rigorous assessment of the implications and uncertainties of changes in U.S. renewable fuels policy. The analysis builds on years of work, including a series of three Farm Foundation publications, “What’s Driving Food Prices,” published in July 2008, March 2009 and July 2011.