EPA Asks for Public Comment on Renewable Fuel Standard Waiver Request

Due to this summer’s extreme weather across much of the United States, there will not be as much corn or soybeans to go around next year. Consumption will have to be cut back until the 2013 harvest. The question of who will have to cut back has become as much a political question as an economic one. A number of governors have called upon EPA to waive the Renewable Fuel Standard to reduce the ethanol industry’s demand for corn and so make more of it available at lower prices for livestock, poultry, and dairy producers. But it may not be as straight forward as that. The EPA is seeking public comment.

We will not know until the 2012 harvest is complete just how big a toll this summer’s extreme heat and drought will have on the nation’s crop production, but the USDA is estimating that the corn crop will be about 13 percent lower than in 2011 and the soybean crop will be about 12 percent lower, based on an August 1 assessment. Private analysts predict that losses may be greater than this.

Crop, poultry, livestock, and ethanol producers have already been hit hard. Many may go out of business. Consumers are not likely to feel the pinch for many months, but food price increases will come. Meat and dairy prices will go up the most, according to the USDA .

The bottom line is that there will not be as much corn or soybeans to go around for the next 12 months. Consumption will have to be cut back through much of next year until the next crop is harvested.

In 2011, the primary use of the U.S. corn crop was for animal feed, according to the National Corn Growers Association, based on USDA data . This included 36.3 percent that went directly for animal feed, the equivalent of another 12.2 percent of the crop that was returned for animal feed in the form of dried distillers grains (DDGs) (a byproduct of the ethanol industry), and about 13.0 percent of the crop that was exported to other countries where it is used primarily for animal feed. A net of about 27.3 percent of the crop was used for ethanol production (after subtracting the DDG’s). About 4.1 percent was used to produce high fructose corn syrup. And the remaining 7.1 percent included the production of other processed food ingredients (such as corn starch and corn oil), the production of other bio-based products, seed, and carry-over stocks.

However, in the wake of this crop disaster, the political question has become: How should the significant costs of this natural disaster be distributed? Who should bear the brunt?

In recent weeks, the governors of Arkansas, Delaware, Georgia, Maryland, New Mexico, and North Carolina have separately petitioned the EPA to waive the Renewable Fuel Standard (RFS) for 2012 and 2013. They argue that reducing demand for corn from the ethanol industry will make more corn available at lower prices for livestock and poultry producers in their states. Bloomberg Businessweek reported August 7 that 25 senators and 156 representatives sent petitions to the EPA calling for a waiver, as well. The Director General of the UN Food and Agricultural Organization Jose Graziano da Silva has also called for a waiver. All assert that by waiving the RFS corn prices will ease.

On August 20, the EPA opened a 30-day period to receive public comments on the waiver requests from the governors of Arkansas and North Carolina . In the request for comment, the EPA stated that " Section 211(o)(7)(A) of the Clean Air Act allows the Administrator of the EPA to waive the national volume requirements of the renewable fuel standard program in whole or in part if implementation of those requirements would severely harm the economy or environment of a State, a region, or the United States, or if the Administrator determines that there is inadequate domestic supply of renewable fuel. "

But an RFS waiver may not be as straight forward as that, and the reduction in ethanol blending may not happen all that quickly to ease the plight of livestock producers. The many factors affecting whether a waiver will actually reduce ethanol production and corn prices are explored in two recent studies: Potential Impacts of a Partial Waiver of the Ethanol Blending Rules , prepared for the Farm Foundation by Wallace E. Tyner, Farzad Taheripour, Chris Hurt of Purdue University, and Updated Assessment of the Drought’s Impacts on Crop Prices and Biofuel Production , by Bruce Babcock of Iowa State University.

Much depends on the prices of oil and gasoline, which have risen significantly in recent months and again this week, according to the Energy Information Administration (EIA) here and here . Currently, ethanol, which sells for about $2.60 per gallon wholesale, is cheaper for blenders to use than reformulated gasoline, which sells for about $3.00 per gallon wholesale. Until either oil prices come down or ethanol prices go up further, blenders will not have much incentive to reduce their demand for ethanol – even with a waiver.

Then there is the question of what happens if fuel refiners do stop blending corn ethanol. More ethanol plants will close. Thousands more people will be laid off. Hundreds more rural communities will be affected. And consumers might not get off that easily either. Ethanol displaces about 10 percent of the gasoline supply. That 10 percent (or whatever net reduction a waiver might call for) will need to be replaced with more gasoline made from oil imports. How much will gasoline prices at the pump and the global price of oil go up by if U.S. gasoline demand increases by five or ten percent to cover the gap?

In the meantime, the ethanol market seems to be responding to high corn prices without a waiver. Plants are shutting or reducing production for lack of corn and high prices. Corn ethanol production has already dropped more than 13 percent since the beginning of June due to high corn prices and low fuel demand, according to the EIA . The current surplus of ethanol in storage (over 19 million barrels) is beginning to be drawn down. And, imports of ethanol from Brazil are up, and U.S. exports are down more than 20 percent, according to Bloomberg Businessweek .