Ethanol Mandates Need to Be Waived
Aug 24, 2012
For dairy and livestock producers, it's a no-brainer. EPA administrators, however, will be under intense pressure from waiver opponents. But there is middle ground.
There’s been an awful lot of cyber-ink flowing the past couple of weeks over whether the U.S. Environmental Protection Agency (EPA) should waive its Renewable Fuels Standards (RFS) mandates due to the drought-shriveled corn crop.
Last week, EPA issued a statement that it is seeking comments on the waiver.
Mandate proponents, of course, are in full-throat support. And a study by Purdue University ag economists suggests that if corn prices remain in the $8/bu. range and oil jumps to $120/barrel, waiving the mandates won’t matter. Market forces would then incentivize ethanol plants to keep on fermenting the stuff.
But that same study suggests that if oil remains below $100/barrel and the EPA waives the mandates, corn prices could fall modestly—perhaps as much as $1.30/bu. That would be a 16% decrease on $8 corn.
I ran some of these feed prices through a University of Nebraska Extension spreadsheet used to estimate Midwest cost of production and breakeven milk prices. Even then, when corn was $5.25/bu., soybean meal $300/ton and dairy quality hay $150/ton, feed costs were running $11.40/cwt. of milk produced for a herd averaging 20,000 lb./cow. Feed costs dropped to $10.44 if the herd average was 24,000 lb./cow.
If I use the Purdue corn price estimates, feed costs jump 70%. In Purdue’s worst case scenario—severe drought with no RFS waiver—corn prices jump to $8.57/bu. When I plug that in with current soybean meal and hay prices, feed costs per cwt. of milk sold jump to $19.62 for the 20,000 lb./cow herd and $17.74 for the 24,000 lb. cow herd.
If, on the other hand, ethanol blenders carry forward their RFIN credits (ethanol they’ve already blended above and beyond requirements in previous years) and EPA waives the remaining mandates, corn prices could drop back to $6.58/bu. When I plug that number into the spreadsheet, feed costs drop to $17.79/cwt. for the 20,000 lb./cow herd and $16.14/cwt. for 24,000 lb./cow herd. The reason they don’t drop further is that soybean meal and alfalfa prices will likely remain high because of drought shortages.
Dairy and livestock producers see waiver of the mandates as a no-brainer. To them, continuing to mandate ethanol production and blending in the face of the worst drought in 50 years is nonsensical. But EPA administrators will be under intense pressure from the other side not to waiver, so to speak.
The middle ground would be for EPA to waive the “other advanced” RFS mandate, which is 750 million gallons of ethanol in 2013. Sugarcane is included in this category, and could then be credited to the conventional RFS category (and sugarcane ethanol imports would likely increase as well). “The sum of the other advanced mandate plus carry-forward RINS could potentially be about 1.2 billion bushels of corn,” say the Purdue economists. “That represents about 24% of the effective corn mandate which is roughly the size of the projected corn crop shortfall.”
Let’s hope EPA at least takes this middle ground. With $8.57/bu. corn, the breakeven milk price is approaching $27/cwt. for 20,000 lb./cow herds and just over $24/cwt. for 24,000 lb./cow herds. Getting the corn price back down to $6.50/bu. means those break-evens drop to $25 and $22.50, respectively. Even that’s not pretty. But it’s sure less ugly.