Should the Renewable Fuel Standard Be Waived in Times of Drought?

The continuing drought and heat wave across the United States has damaged or destroyed much of the nation’s corn and soybean crop. Soaring futures prices for these commodities are hitting livestock and biofuel producers alike. The livestock industry and its allies are calling for Congress and the EPA to roll back the Renewable Fuel Standard to reduce demand for corn. But is this warranted? What are the alternatives?

The EPA has the authority to waive the Renewable Fuel Standard (RFS) if it "determines that implementation of the RFS mandate would severely harm the economy of a State, region, or the United States."

On July 30, a coalition of national and regional livestock, poultry and dairy producer groups petitioned EPA Administrator Lisa Jackson to waive the RFS for one year, citing the impact of the drought and renewable fuel standards on corn feed prices. Separately, on July 27, a Reuters report in the Chicago Tribune reported that the governors of Arkansas, Nebraska, South Carolina, and Texas are considering asking the EPA for a waiver. And, earlier this month, Representatives Bob Goodlatte (R-VA) and Jim Costa (D-CA) introduced a bill ( H.R. 3097 ) "to partially waive the renewable fuel standard when corn inventories are low."

For 2012, under authority of the RFS, the EPA is requiring that fuel refiners blend 13.2 billion gallons of corn-based ethanol into the nation’s gasoline supply. It will require about 4.7 billion bushels of corn to produce this amount of ethanol (based on an estimated yield of 2.8 gallons per bushel), or roughly 40 percent of the corn crop in a good year. However, approximately 35 percent of that volume would actually be returned to the feed market as concentrated high-protein feed rations.

The corn crop may come in 20 percent or more below the original, pre-drought estimates of 14 billion bushels. The USDA estimates that overall food prices for consumers may increase three to four percent in the year ahead as a result of the drought, slightly more than the normal rate of food inflation, based on current crop estimates. Meat and dairy prices will go up the most. However, the impact on dairy and meat producers likely will be significantly greater because feed costs are such a large portion of their production costs.

The National Farmers Union , the National Corn Growers Association , and the Renewable Fuels Association oppose waiving the RFS at this time.

Is a waiver necessary? Ethanol producers are already reducing production, and there is flexibility built into the RFS to respond to situations like this crop failure. 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 Energy Information Administration . A number of plants have been shut down and others have reduced output. There is a huge surplus of ethanol waiting to be sold—over 19 million barrels. Finally, the RFS allows fuel blenders to use tradable credits to shift a significant portion of their blending requirement (approximately 2.4 billion gallons) from one year to the next to accommodate years like this when crop production is low.

Would a waiver make any difference for livestock feed prices this year? Not much, according to recent analysis by Bruce Babcock at the Center for Agricultural and Rural Development at Iowa State University. Babcock estimates that waiving the RFS would result in only about a 4.6 percent (28 cent) decrease in corn prices compared to the current policy—if the maximum amount of tradable credits is carried over between marketing years.

However, an RFS waiver would have a huge, harmful economic impact on the biofuels industry. The RFS was enacted in 2005 and expanded in 2007 with strong bipartisan support to advance a variety of national energy, economic and environmental security goals. Since then, an industry has been launched, tens of billions of dollars have been invested, hundreds of thousands of direct and indirect jobs have been created, and U.S. petroleum dependence has begun to decline. The RFS is beginning to make a difference. But the greatest and most positive energy, economic, and environmental impacts of the policy are yet to come.

Dozens of next generation, advanced biofuel pilot and demonstration projects, which do not use corn starch, are ready or near ready for launch to commercial scale. Continued strong federal policy support is needed now to bring this national priority to fruition and to ensure that every corner of the country benefits. The United States has the potential to meet 30 percent or more of its liquid transportation fuel needs with domestically produced biofuels—several times more than the United States produces today, according to a recent study by Heather Youngs and Chris Somerville, published in July's Scientist . Now is not the time to pause and send cutting-edge technology innovators and private investors fleeing.

The federal response to the drought should not be to sacrifice one industry and tens of thousands of jobs for the benefit of another. Rather, in the short term, a more sensible approach would be to provide as much assistance as possible to those whose jobs and businesses are directly harmed by the drought. Over the longer term, federal agriculture policies should encourage the development of higher yielding and more drought-resistant crop varieties, more sustainable farming practices that help farmers and ranchers mitigate and adapt to the effects of extreme weather events and climate change, and accelerated development and use of more sustainable next generation biomass crops and biofuels that are not made from corn starch.