On Jan. 1, 2012, the 45-cents-per-gallon tax credit given to gasoline blenders who use ethanol in their formula, along with import tariffs on ethanol, expired without much fanfare. The subsidy had been under heavy attack from livestock groups, petroleum marketers and grocery manufacturers. The Renewable Fuels Standard (RFS) will continue to put a floor under ethanol production, and thus corn demand, but corn prices will still suffer.
Matt Roberts, agricultural economist with The Ohio State University, thinks the long-term average impact of eliminating the blenders' credit will be a negative 25 cents per bushel on corn. "In short crop years, ethanol plants will ration more quickly," he says. "The top will be taken out of the market."
The RFS requires that a share of mandate be filled by corn-based ethanol, but that share tops out at 15 billion gallons in 2015. Last year, ethanol plants produced 13.7 billion gallons of ethanol, well over the 2011 mandate of 12.6 billion gallons for conventional biofuel as dictated by the Energy Independence and Security Act of 2007.
Ethanol blenders, however, are able to trade and hold renewable identification numbers (RINs). These RINs are used to measure compliance, and one RIN is equal to one gallon of ethanol. RINs can be carried over from one year to another, so production in one year can be used to meet mandates in the next when it becomes uneconomical to blend ethanol or when ethanol is not readily available.
"There are excess RINs for 2011 and probably every other year," says Chad Hart, Iowa State University economist. However, blenders as a group are limited to carrying over 20% of the current year’s mandate (13.2 billion gallons) in RINs. In 2013 the mandate increases to 13.8 billion gallons. It rises again in 2014 to 14.4 billion gallons before topping out at 15 billion in 2015.
As long as crude oil prices
and corn prices
provide a positive margin for ethanol plants, ethanol will be made, Hart says. Worst case, Hart says, would be if the U.S. were to enter into another deep repression in 2012, which is possible but unlikely. If a double-dip recession were to happen, though, oil prices would plunge, making ethanol production uneconomical. He calculates that RINs equal to 20% of the 2012 mandate would equate to nearly 1 billion bushels of corn.
"Nine hundred to 1 billion bushels [of lost corn demand] would have a tremendous impact on corn prices," Hart says. "We’d be talking about prices getting back into the $3 per bushel range, but the likelihood of that happening is very small." That’s because economists expect ethanol margins to continue to encourage production, making ethanol attractive to blenders.
When margins for ethanol plants tighten or go negative, possibly later this spring or summer, ethanol producers could shutter their plants for longer periods of time when they close for cleaning and repairs, Roberts says. "But I don’t think corn demand will fall substantially," he adds, as long as the RFS remains intact.
"It is clear that now that the tax credit and tariffs have been eliminated, the next target of petroleum marketers, the meat industry and grocery manufacturers is the Renewable Fuels Standard," Roberts says. But reducing or eliminating the RFS is easier said than done. "To change or eliminate it, 218 members of Congress, 60 senators and the President would need to agree," he says.
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- March 2012