Sep 17, 2014

Ethanol Mandate in Crosshair

October 15, 2012
By: Sara Schafer, Farm Journal Media Business and Crops Editor

Pressure is on EPA to waive Renewable Fuels Standard

Odds are that not enough corn will be harvested this year to meet the wants and needs of major end users. USDA’s September estimate for corn production stands at 10.727 billion bushels, which is down 13% from 2011 and the lowest U.S. production since 2006.

This dramatic reduction in  supply was the driving force behind the recent skyrocket in corn prices. Livestock producers, ethanol plants and importers have been making needed cutbacks in consumption and crunching the numbers to determine just how much they can pay.

Because of high corn prices, many cattle, pork and poultry organizations are calling for a waiver of the Renewable Fuels Standard (RFS), which requires 13.2 billion gallons of corn-based ethanol to be produced in 2012. Around 4.7 billion bushels of corn will be needed to reach that production level. For 2013, 13.8 billion gallons are required, which will consume 4.9 billion bushels of corn.

Rob Vandenheuvel, general manager of California’s Milk Producers Council, says his organization strongly opposes the RFS. "Dairy and other livestock farmers compete with ethanol plants for a corn supply. A waiver of the ethanol mandate would put ethanol plants and livestock farmers on the same playing field, eliminating the federal government’s role in picking who does and doesn’t get fair access to the corn production," he says.

Garry Niemeyer, an Auburn, Ill., farmer and president of the National Corn Growers Association, says that while he understands the pain and financial stress livestock producers are
experiencing, he doesn’t believe an RFS waiver will solve the problem. "The drought is what caused economic harm this year, not the RFS.

"We think it is way too premature to require a waiver because we do not know the final yield of the corn crop." Additionally, he says, if ethanol production were to be decreased, so would the supply of distillers’ grains.

Ethanol Economics. Chris Hurt, a Purdue University agricultural economist, was part of a team that studied how a waiver of the federal ethanol mandate might affect the corn and ethanol markets. He says the cost of ethanol is so cheap compared with wholesale gasoline that corn prices would have to drastically increase (to around $9.50) or crude oil would have to drop $20 or so, to $75 per barrel. "Neither of those looks likely."

The other main factor is that oil companies might not have the mechanical or technical flexibility to change their blending amounts.

"The oil industry will look at what’s the best economics. If the Environmental Protection Agency reduces the mandate, it may not reduce the amount of corn that would go into domestic ethanol production," Hurt says. The RFS is a minimum amount of required ethanol, so Congress would have to set a maximum amount to limit the amount of corn going into ethanol.

If a waiver was put in place and the oil refiners and blenders had flexibility with their ethanol use, the study shows, corn prices could be reduced between 47¢ and $1.30 per bushel, depending on the size of the waiver.

Regardless, Hurt says, the demand destruction from this year’s short corn crop will not be easy to rectify. If an average corn crop is harvested next year, ethanol plants could quickly renew capacity. "But when you  destroy demand in the livestock industry, you don’t just flip a switch and turn it back on."

The poultry industry can recover within a year, hog production will take at least two years and the beef industry has the longest lag. 

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FEATURED IN: Top Producer - October 2012


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