CME: Would RFS Waiver Affect Corn Prices?

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US - This week?s hot topic is whether a partial or complete waiver of the renewable fuel standard (RFS) would have any material impact on corn prices, write Steve Meyer and Len Steiner.

Several livestock groups have petitioned the EPA administrator to enact such a waiver. Those requests may or may not be answered but similar requests from at least four governors must be addressed by EPA. At least three groups of economists have weighed in on the debate and the general conclusion at this time is that a waiver may not do much to reduce the amount of corn used by ethanol manufacturers and would thus driven a relatively small reduction in prices. Let?s review the issues at hand and how they may come to bear on the market situation.

The Renewable Fuel Standard is a series of requirements in the 2007 Energy Act that mandates amounts of various biofuels that must be used each year. The standard applies to biodiesel and cellulosic biofuels but the one of interest in this debate is the category of renewable biofuels which basically includes only corn-based ethanol.

The requirements are for a calendar years? usage ? a fact that confounds usage numbers a bit already since the calendar year does no match the September-August crop year we use in the corn balance sheet. The corn ethanol mandates for 2012 and 2103 are 13.2 and 13.8 billion gallons, respectively. Weighting those proportionately gives a mandate level of 13.6 billion gallons for the ?12-?13 crop year. At an ethanol yield of 2.8 gallons/bu., that would require 4.857 billion bushels of corn. USDA?s current estimate is 4.500 billion bushels.

But there is some flexibility built into the law. Blenders have used more ethanol than was required in past years, thus generating credits called RINs that can be used to satisfy part of this year?s mandate. No one knows just how many RINs are out there but the consensus is that there are 2 to 2.5 billion gallons (715 to 900 million bushels) worth available. In addition, ethanol stocks are still larger than normal and these stocks can be used to meet some of the RFS requirements for the rest of 2012 and 2013.

A major issue in the debate at present is just how much operational flexibility exists at the blender level. The question is whether the current use of ethanol as an octane enhancement for motor fuels will allow a reduction in its usage in the short run. Note that this is octane enhancement, not oxygenate ? the use that drove ethanol prices through the roof back in 2006 when MTBE was withdrawn from the market over environmental concerns. The argument is that refineries are making gas with roughly 84 octane and changing that practice will be difficult and costly so refineries may not do it ? especially if the waiver is perceived to be for only one year. If blenders either cannot or will not change this practice, then any waiver to the RFS will have little impact. This was a primary part of the discussion by Purdue researchers on the Farm Foundation?s webinar yesterday morning. We have heard from other sources, though, that octane usage and inflexibility are not as large as has been touted and that refiners would change quickly if allowed to do so. Someone needs to determine the truth on this one because it is quite critical to the outcome.

More at http://www.thecattlesite.com/news/39567/cme-would-rfs-waiver-affect-corn-prices
 
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