Waiving Ethanol Mandates Won’t Cut Corn Prices—Much

11:06AM Aug 16, 2012
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As the conventional wisdom goes, getting out of any long-term relationship, is well, complicated.

And when it comes to ethanol and its marriage to the Renewable Fuels Standards (RFS), that conventional wisdom applies in spades.

An analysis by Purdue University suggests corn prices would fall just 47¢ to $1.30/bu, depending on the level of RFS waiver and the severity of the drought currently gripping the nation.

"The bottomline: If refineries and blenders have flexibility to reduce ethanol usage in the short term, use of prior blending Renewable Fuel Identification Numbers (RFIN) credits and/or a waiver could reduce corn price around $1.30/but for a large waiver or 47¢/but for a modest waiver," say Wallace Tyner, James and Lois Ackerman, Farzad Taheripour and Chris Hurt, all ag economists with Purdue.

The economists don’t expect the Environmental Protection Agency to offer any waivers for the remainder of 2012, mostly because blenders only need to use another 5.6 billion gallons of ethanol yet this year. And since blenders have already stockpiled some 2.6 billion gallons of RFIN credit, they are required to blend as little as 3 billion gallons yet this year.

"The real question is what happens in 2013, when the ethanol blending obligation increases to 13.8 billion gallons (up 600 million gallons from 2012)," they write.

And that’s when things get complicated. Not only is the RFS waiver in play, but the simple economics of corn and crude oil prices determine whether ethanol plants keep operating. "If the corn price remains in the $8 range and the price of crude oil increases to the area of $120/barrel, waiving part of the RFS would have little impact because ethanol likely would be demanded by the market regardless of the level of the RFS," say these authors.

Things get less clear if crude oil prices remain below $100. In addition, EPA could opt to totally waive the "other advanced" RFS mandate, which is 750 million gallons for 2013. Sugarcane ethanol is included in this category, and could then be credited to the conventional category. Sugarcane ethanol imports would also likely increase.

"The sum of the other advanced mandate plus carry-forward RINs could potentially be about 1.2 billion bushels of corn," say the economists. "That represents about 24% of the effective corn mandate which is roughly the size of the projected corn crop shortfall."

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