USDA economists evaluate RINS stocks, impact of mandate changes

By Susanne Retka Schill | April 24, 2014

Two USDA economists took up the U.S. EPA’s request for comments on whether and how to account for carryover renewable identification numbers (RINS) in setting yearly mandated renewable fuel volumes. “The availability of RIN stocks will interact with final mandates for 2014 to affect price of RINs and likely carry-out decisions for 2014 and thus mandates beyond that,” they wrote in a recent FarmDocDaily post

The two, Rob Johansson, deputy chief economist, and Seth Meyer, senior economist, analyzed the market for RINs, saying it can be helpful to compare and contrast carryover RINS with the grain market.

The analysis examines the ways that RINS stocks function like the traditional stocks-to-use ratios in the grains market, as well as important ways in which they differ. A function of carry-in RINS is to deal with unexpected fluctuations in supply and demand, operating in much the way that the grain market’s stocks-to-use ratios. The proposed change to the 2014 RFS would essentially create neutral stock position, where beginning and ending stalks would be expected to remain relatively constant.

An updated evaluation of RIN stocks and production, however, already indicates the U.S. EPA’s estimates contained in the revised rule are outdated. “In his assessment of available RIN stocks, [University of Illinois economist Nick] Paulson suggests a significantly smaller RIN stock drawdown of 0.794 billion RINs in 2013; rather than the 1.4 billion gallons anticipated by EPA in the proposed rule. That estimate reflects an apparent RIN generation/biofuel consumption of 15.756 billion gallons in 2013 and results in a RIN carry-in for 2014 of 1.872 billion gallons, higher than the 1.2 billion gallons estimated in the proposed rule.”

With little history to draw upon and uncertainty on the final 2014 mandate, the USDA economists pointed out that determining a healthy level for RINs stocks is difficult. “Lowering of mandates will lower the anticipated stock needs.  Similarly reducing uncertainty about future RFS policies will reduce the value of those stocks, leading to a lower optimal level of RIN carry-in. Plentiful RIN stocks will discourage current period RIN production and consumption feeding back into lower RIN stocks.  Given the proposed method for setting future mandates, such an observation of scaled back production and consumption of biofuels in 2014, could lead to more conservative mandates (and lower expected RIN prices) in the future.”

Such a path dependency in mandates could work in the other direction, the economists suggested. “If market participants expected more binding mandates in the future, there would be an incentive to build stock levels today despite higher RIN prices to offset compliance costs in the future and build out infrastructure in anticipation of more use.  Observing increased production and consumption of biofuels in the current year, could translate to more aggressive mandates (and higher expected RIN prices) in the next year.”

To view the entire analysis click here. An earlier analysis by the two USDA economists can be found here