Potential Impacts if Corn-Based Ethanol Mandate Trigger Legislation Becomes Law

October 19, 2011 07:05 AM

The U.S. livestock industry sector in large part was late to the draw in analyzing how some prior farm bill-related initiatives could impact the livestock, dairy and poultry sectors - programs such as country-of-origin labeling and efforts via the GIPSA rule regarding livestock and poultry marketing practices being just two recent examples. Some observers say the same thing could be said for the groups' push to alter the mandate for corn-based ethanol.

But in the case of ethanol incentive payments, and the mandate, there have been economic reports. One is a study by Bruce A. Babcock and Jacinto F. Fabiosa called The Impact of Ethanol and Ethanol Subsidies on Corn Prices: Revisiting History. Babcock also released a report in 2010, Mandates, Tax Credits, and Tariffs: Does the U.S. Biofuels Industry Need Them All? Also, FAPRI, in 2009, released a report looking at various ethanol policy options. FAPRI has also completed other ethanol/biofuel-related reports. In 2009, the General Accountability Office (GAO) released a report, Potential Effects and Challenges of Required Increases in Production and Use.

The Renewable Fuel Flexibility Act was introduced by Reps. Jim Costa (D-Calif.) and Bob Goodlatte (R-Va.). It would seek to alter the renewable fuel standard (RFS) by linking the corn stocks-to-use ratio (s/u ratio) to the requirements for corn-based ethanol. The goal, supporters said, was to give relief to livestock producers, dairymen and consumers. "The RFS has been incredibly successful in replacing a portion of the oil we import with home-grown energy, and I continue to support RFS. But our continued reliance on corn-based ethanol has impacts," said Costa. "While ethanol is not the only factor I am convinced it is a factor in the high prices farmers pay for feed and consumers pay for food."

The bill is endorsed by the American Meat Institute, the Grocery Manufacturer Association, the National Cattlemen's Beef Association, the National Chicken Council, the National Pork Producers Council, the National Turkey Federation and Oxfam America. It also has support from California groups including the California Poultry Federation, the California Cattlemen's Association, California Dairies Inc. and California Milk Producers Council.

A coalition of seven ethanol and agricultural organizations responded to the legislation. The groups included the American Coalition for Ethanol, the American Farm Bureau Federation, Growth Energy, National Corn Growers Association, National Farmers Union, National Sorghum Producers and the Renewable Fuels Association. NCGA President Garry Niemeyer said the legislation "would put progress made by the ethanol industry in jeopardy and we are asking members of Congress to oppose its passage."

The letter pointed to a July 2011 analysis completed for the International Centre for Trade and Sustainable Development, which found that corn prices would have been exactly the same in 2009-10 and only 18 cents a bushel lower in 2010-11 if both the RFS and Volumetric Ethanol Excise Tax Credit had not existed. In addition, most of the 18 cents was attributed to the 45-cent blender tax incentive or VEETC. "Thus, implementing an RFS waiver trigger based on the stocks-to-use ratio will not have the effects on corn prices desired by livestock and poultry interests," the letter said.
Costa and Goodlatte labeled the proposal "common-sense legislation" that deals only with corn ethanol, not advanced biofuels.

If the bill passes Congress, and is signed into law -- both tough hurdles, the mandated level of corn-based ethanol would be determined twice yearly, with the administrator of the Environmental Protection Agency (EPA) reviewing USDA reports on corn stocks-to-use ratios. When certain stocks-to-use ratios are met, the EPA would issue a waiver to the corn ethanol portion of the RFS.

The following are details of the legislative initiative, via Rep. Costa's web site:

Renewable Fuel Flexibility Act

This legislation will alter the Renewable Fuels Standard (RFS) to give relief to livestock and food producers and consumers of these products. In the 2004/2005 crop year, the last crop produced before the RFS was implemented, 53.4% of that crop went to feed livestock and poultry and 12.5% went toward ethanol production. In contrast, the corn harvest this year is projected to send 40% toward ethanol production and 37.6% to the livestock and poultry feed supply. This year livestock and poultry producers will use 1.1 billion fewer bushels of corn than the 2004/2005 crop year, and this will be the first year ever that ethanol production has used more than feeding livestock and poultry in the US.

This legislation will link the amount of corn ethanol required for the RFS to the amount of the U.S. corn supplies. This legislation sets up a process, so that twice a year, when the USDA reports on U.S. corn supplies, based upon the ratio of corn stocks- to expected use, there could be a reduction made to the RFS. This is a common sense solution to make sure that we have enough corn supplies to meet all of our demands. Additionally, the bill contains language that these reductions will only be made from corn ethanol, this does not affect advance biofuels.

How will the determination be made?

The Administrator of the Environmental Protection Agency will review the current corn crop year's ratio of U.S. corn stocks-to-use in making a determination of the RFS. This assessment will happen twice a year.

By the end of November each year when the Administrator of the Environmental Protection Agency makes the final official determination of the Renewable Fuels Standard (RFS) for the following calendar year, the Administrator shall use the U.S. Department of Agriculture report, published in the prior month's (November), World Agricultural Supply and Demand Estimate (or similar public and authoritative estimates provided by the Secretary of Agriculture) to determine the U.S. corn stocks-to-use ratio. The Administrator shall provide for a waiver for the RFS, for traditional corn ethanol, for the following calendar year according to the calculated stocks to use ratio as directed. Such a waiver, if required, shall be included in the Environmental Protection Agency's Federal Register notice regarding the RFS for the following calendar year. The required waiver, if any, will take effect January 1 of the new calendar year.

Further, in June of each year the Administrator shall be required to re-assess the current corn crop year's ratio of U.S. corn stocks-to-use ratio. The Administrator shall use the U.S. Department of Agriculture report World Agricultural Supply and Demand Estimate (or similar public and authoritative estimates provided by the Secretary of Agriculture) for June to determine the U.S. corn stocks-to-use ratio. The same ratio for the waiver as used for the December assessment shall be used for the June re-assessment in the schedule provided below. Whether a waiver is required or not, following the June re-assessment, the Administrator shall publish a Federal Register notice stating the Administrator's determination for the waiver to remain unchanged or to change the waiver. The Administrator in the Federal Register notice shall explain the reasoning and evidence for the determination regarding the waiver. The stocks- to-use ratio shall be the exclusive factor in the Administrator's final determination with respect to the waiver unless the Administrator provides clear and compelling evidence that such a waiver would not have a material effect on the quantity of corn available for use for food and feed.

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The bill if signed into law would put even more focus on USDA estimates and forecasts - both supply and demand. Over the past year, USDA's Grain Stocks reports have brought significant surprises. One analyst said, "Do they want even more scrutiny that has real global market implications?"

Volatile indicator. Geoff Cooper, vice president of the RFA, according to Ethanol Producer Magazine, called the approach dangerous and misguided. "History shows the ratio is, at best, a crude and highly volatile indicator of market conditions that is not fit to serve as a mechanism for important public policy decision-making," he said.

One industry analyst said, "One reason the RFS bill is a really bad idea: The disruption from the variability of forecasting accurate stocks-to-use ratio will be magnified if it triggers demand cuts once the new stocks-to-use ratio is released. This will also occur from speculation as to what the new ratio will be in anticipation of a change in ethanol demand."

Point, counterpoint. While some grain industry analysts said the legislative initiative could backfire because it could lead to lower plantings of corn and potentially higher prices as a result of reduced acres seeded to corn, others say the question is, Would the cut in ethanol usage be greater than the reduction in production of corn, which it most likely would be. This group believes the cut in the mandate would be greater than the loss in corn production, therefore benefitting livestock producers.

Also, there still could be incentive to produce corn beyond any action on the mandate, others note.

There would be implications should the mandate be altered in the summer timeframe, an analyst said, as it would have US government expense implications. For example, if the revenue (either assurance or insurance) programs are set with a harvest price in the spring, and the EPA uses the off-ramp that lowers prices, the payouts to corn producers could be big. It is unclear if the lawmakers pushing this bill have asked the Congressional Budget Office (CBO) for a budget score.

There is also the risk of unintended consequences of public policy. One analyst said this could be the most production distorting policy since the World Trade Organization started and that the adjustments in policy would happen just as the Southern Hemisphere is ready to plant. Would an EPA ruling fall under WTO for Agriculture? the analyst asked.

Perspective: One Capitol Hill source said, "Even if the trigger folks find a bill, it won't fly. I've heard that from offices who aren't Corn Belt or particularly friendly with ethanol, so I think the information is solid. That's this Congress, but give it another year or two and a different Congress and the situation may change. The feeling is that if the RFS is going to change, it's not going to be a corn trigger, but they would likely make it more feedstock neutral. It should be noted that the law already permits states to appeal to EPA for opting out of RFS, and Texas had filed that but was turned down a few years ago."



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