Ethanol is the subject of hot debate as it is gobbling up corn bushels in the third consecutive year of tight supplies and high feed prices for livestock producers.
The U.S. Agriculture Department forecasted that corn production this year will drop 13% to a six-year low as a result of the historic drought nationwide, the calls to divert more corn for food versus fuel are likely to grow more urgent, Ohio State University Extension economist Matt Roberts said.
The USDA said it expects corn growers to average 123.4 bushels per acre, down 24 bushels from last year. In Ohio, those numbers translate into a projected 126 bushels per acre, which is down 32 bushels per acre from last year for corn.
For livestock producers already suffering because of poor pasture conditions and high hay costs from the historic drought, that means higher feed costs and the potential that more of them will be forced to sell their herds because they can’t afford to feed them, Roberts said.
This is prompting increased calls to divert less corn this year to ethanol by easing the U.S. ethanol mandate, he said. Under the Renewable Fuels Standard, U.S. fuel companies are required to blend 13.2 billion gallons of ethanol into gasoline in 2013, or about 10% of total gasoline usage, which requires converting some 40% of the U.S. corn crop into the biofuel.
“There is more and more pressure for the ethanol mandate to be reduced for the current year to increase the availability of corn for livestock feeding,” Roberts said. “Given the yield forecast, coupled with this extreme reduction in feed demand, it will strengthen the case for an ethanol standards waiver.”
A group of 25 U.S. senators sent a letter to the Environmental Protection Agency urging the agency to use its waiver authority to adjust the country’s ethanol mandate. Under its normal schedule the EPA has until October to gather information on the extent of any economic harm done by the original Renewable Fuel Standard level and to decide if it will issue a waiver.
As it stands now, ethanol will be produced from 38% of this year’s crop, down from 41% last year, according to government estimates. But the EPA could waive the renewable fuel standard if it causes an extreme disruption in the input markets or if the fuel is unavailable.
“Many people are calling for the waiver on the grounds that the mandate is causing extreme disruption, but many in the ethanol and renewable fuels industry don’t want to see the waiver granted because they see it as a slippery slope for future repeal of the renewable fuel standard,” Roberts said.
The drought has hit the livestock industry hard, he added. The lack of substantial rainfall, extreme heat and dryness have left many producers short on hay and silage supplies and looking for any alternative forages they can plant to make up for the shortages.
The livestock industry is asking for an ethanol standard waiver, in any amount. But, corn prices would not necessarily moderate if the federal government’s corn ethanol mandate were temporarily suspended, according to a report by Purdue University agricultural economists.
The report, “Potential Impacts of a Partial Waiver of the Ethanol Blending Rules,” suggests that corn prices could fall under some scenarios should the U.S. Environmental Protection Agency grant a partial waiver of the Renewable Fuel Standard’s corn ethanol provision — but only under certain market conditions.
“The range of impact of an RFS waiver goes from zero to $1.30 per bushel for corn,” said Wally Tyner, a Purdue University energy policy specialist and the report’s lead author.
In the Purdue study, Tyner, along with fellow agricultural economists Chris Hurt and Farzad Taheripour, looked at future corn and ethanol prices with and without an RFS waiver, how Renewable Identification Numbers and crude oil prices could factor in ethanol use, and what might occur if the drought worsens.
“If corn prices remain high, which seems likely, and crude oil remains at $100 a barrel or lower, then reducing the RFS could reduce the demand for ethanol and, consequently, the demand for corn,” Tyner said. “If the waiver resulted in less demand for ethanol that would, in turn, lead to lower corn prices than would have existed without the waiver. It also could lead to more ethanol plant closings — at least temporarily.”
Conversely, an EPA waiver could have little effect if crude oil moves beyond $120 a barrel and oil companies continue blending ethanol at current levels, Tyner said.
“However, because of carry-forward blending credits from prior years — the RINs — refiners and blenders could decide to produce and blend 2 billion fewer gallons of ethanol,” Tyner said. “That change alone could reduce the price of corn around 67 cents a bushel. And that is without any EPA waiver.”
The EPA will have much to consider before rendering its waiver decision, Tyner said.
“It will have to determine what impact issuance of a waiver actually would have, given the way the market functions at present,” he said. “For technical and economic reasons, refiners may well continue to use nearly the same amount of ethanol even if they are not required to because of a waiver. Technically, they may not want to change their current mix of gasoline and ethanol to make 87-octane gasoline, as an example. Economically, they would not be expected to reduce ethanol use as long as ethanol prices are below gasoline, as they are now. If refiners and blenders don’t have or choose not to use operating flexibility, and if reduced use of ethanol is not economical, then a waiver would have no impact.
“To the extent that refiners and blenders do have flexibility with their use of ethanol, a small waiver could reduce corn prices around 47 cents a bushel, while a large waiver could reduce it as much as $1.30 a bushel, depending on economic conditions.”
Should a waiver lead to reduced ethanol use, the EPA could have an influence on who bears the brunt of the drought-related corn losses, Tyner said.
“The total amount of harm from the drought is in the tens of billions of dollars,” he said. “The EPA cannot change the loss. It can only potentially redistribute it among the affected parties: ethanol producers, livestock producers, corn growers, and domestic and foreign consumers.”