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Ethanol Mandate Battle Begins, but Ethanol Here to Stay

05:38AM Aug 03, 2012
POET ethanol plant

Ranching groups are asking for a suspension of the renewable fuels standard. What will that mean for corn demand and prices?

U.S. ranchers and livestock producers urged the Obama Administration this week to suspend the nation’s renewable-fuels standard (RFS) for the rest of the year and into 2013.

The livestock and ranching groups argued that demand for corn used to make ethanol is reducing available corn supplies for feed and food production. The time has come to wean the ethanol industry off government mandates, said J.D. Alexander, president of the National Cattlemen’s Beef Association.

The mandate requires gas refiners to use 13.2 billion gallons of ethanol this year and 13.8 billion in 2013. To meet that requirement, ethanol plants would have to grind 4.7 billion bushels of corn in 2012 and 4.9 billion bushels next year. The request to waive the RFS came when December corn futures were testing the all-time record high of $8.245 on the Chicago Board of Trade.

"It is abundantly clear that sufficient harm is occurring now and that economic conditions affecting grain supplies and feed prices will worsen in the months ahead," the petition stated. "Both conditions provide an independent basis for a waiver of the RFS."

Even if the Environmental Protection Agency were to waive the mandate, regulators would first need to prove that keeping the mandate in place would cause serious economic harm. "They would have to do some economic analysis first," says Bruce Babcock, agricultural economist at Iowa State University. The last time EPA looked at the issue was in 2008, and the agency’s economic workup took 3.5 months, Babcock notes.

Waived RFS Would Cut Corn Prices by 28 cents

Babcock ran 500 scenarios on average 2012 corn yields that fell between 120 and 148 bu./acre. Using the average across all 500 yield estimates and eliminating the mandate for all of 2103 results in a 28-cent drop in the average annual price of corn.

The lower the corn yield actually is, though, the bigger the price decline would be if EPA decided to waive the mandate. In mid-July, forecasters had already reduced their expected corn yield to about 140 and 146 bushels per acre. Since then, corn conditions have deteriorated further.

"Ethanol plants probably cut production by 10 to 15% in June and July. The ethanol price relative to gas has thus gone up a bit, but refineries are finding ethanol is still a good octane source and are willing to pay for it," says Babcock. "Ethanol is bringing value to the market independent of any mandate." Babcock adds that the value proposition of ethanol makes it a strong competitor with livestock producers for corn—regardless of the mandate.

Due to large increases in the cost of their raw material as well as the possibility that EPA could waive the RFS, some ethanol plants are reportedly trying to get out of their natural gas contracts.

"If enough plants shut down, the price of ethanol will substantially increase," says Babcock. "Plants will stay open if they make more money open then closed."
 

 

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