CARD report: Altering RFS would have modest effect on corn prices

A new paper from the Center for Agricultural and Rural Development at Iowa State University indicates that if the U.S. EPA does significantly reduce the renewable fuel standard (RFS) renewable volume obligations, it would mean only modestly lower corn prices. Authors Bruce Babcock and Wei Zhou say this suggests that the EPA should be looking at a more broad policy objective rather than the impact on the price of corn.

“Of key importance to the advanced biofuel industry is whether policy will support the expansion of biofuels consumption by creating incentives to invest in flex cars and fueling stations that will facilitate expanded consumption of low-carbon ethanol,” the report said. “Consideration of the costs and benefits of creating these incentives as part of a national energy policy is of greater long-run importance than the impact of mandates on the price of corn.”

A leaked draft EPA proposal set the 2014 RFS renewable volume obligations far below what is established in the RFS statute. The CARD report looks into the question of what impact that would have on the price of corn, if the numbers in the leaked draft proposal were officially published as a final rule.

The paper looked at two scenarios, the first of which is that the EPA doesn’t change the schedule and the renewable volume obligations remain as is, with corn ethanol increasing to 14.4 billion gallons in 2014 and 15 billion gallons in 2015 and after. To maintain this, the analysis included an expansion of E85 stations. “The results show that the increased ethanol mandates can be met with the 5,000 additional stations through a combination of expanded ethanol consumption and production and a drawdown in the number of banked RINs,” the paper said.

The second scenario would hold the volume obligation to 13 billion gallons, which can be met with E10. Comparing the two scenarios, the economists found that, in the first scenario, corn prices were 5 or 6 percent higher, or about 25 cents more per bushel, and renewable identification number (RIN) prices were an average of 50 to 60 cents higher. Although that difference in corn price would be meaningful to both corn farmers and livestock feeders, it’s actually small when viewed in the context of the market price swings that have happened since 2006, the authors said.

The paper also pointed to dramatic drops in the price of corn this year. In March, farmers received an average of $7.13 per bushel of corn. By October, the average price had dropped 37 percent to $4.49 per bushel, the lowest corn prices have been since October 2010. Unless the 2014 corn crop comes up short corn prices are unlikely to go high again and could even drop further if weather conditions are favorable in the growing season.

Reducing the volume obligation would signal vehicle manufacturers to reduce production of flex-fuel vehicles and investors to back away from higher blend ethanol fueling stations or advanced biofuel facilities, including cellulosic ethanol and even non-ethanol biofuels such as synthetic diesel or gasoline. “A reduction in public policy support for ethanol would only increase the perceived risk that in the future EPA would also reduce its support for other biofuels,” the paper said.

The paper also touched briefly on why the American Petroleum Institute and the American Fuel and Petrochemicals Manufacturers are so interested in reducing volume obligations to levels that can be easily met using only E10. “They have configured their refineries to produce low-octane gasoline that needs to be blended with 10 percent ethanol to produce 87-octane regular gasoline,” the authors said.