Easing The Ethanol Mandate

August 28, 2012 03:53 AM

The United Nations has called for a suspension of the ethanol mandate to boost world food supplies and lower the price of corn. It argues that tapping in to the 40% of U.S. corn that goes into ethanol production would ease corn prices by increasing domestic supplies. A weak Asian monsoon season this year has the prices of rice on the rise and with food prices expected to climb following this year's drought, ethanol is taking some heat.

The Renewable Fuel Standard (RFS1) was part of the 2005 Energy Policy Act (click here for more) and was later revised and extended in 2007 (RFS2) . Part of what RFS does is mandate amounts of renewable fuel to be blended with gasoline and, later, diesel fuel in an effort to reduce greenhouse gases and emissions. But the market is what is driving ethanol sales at the pump, not RFS2, and not carbon footprint credits.

Consequently, easing the mandate to blend ethanol probably would not slow production or consumption of the fuel. A waiver will not help until petroleum prices make straight gasoline cheaper. Thin margins between ethanol and unblended gasoline hurt ethanol at the pump as consumers largely tend to price shop when it comes to fueling their cars.

Models of the impact of a suspension of the mandate on the price of corn estimate a 7% drop in the price of corn would result. This would not do much for world food prices. Add to that election year politics which have President Obama shying away from easing the ethanol mandate fearing the wrath of corn growing voters who are already struggling to maximize profits in a tough year to grow corn.

Ethanol is proving that it has the power to stand on it's own in consumer markets. Easing the mandates outlined in RFS2 would likely push the price of corn down a little, but not enough to make a difference in world food prices. Given the political climate of an election year coupled with consumer driven basics of supply and demand, don't look for mandates on ethanol to be eased anytime soon.


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