USDA ERS report offers RIN price outlook for coming decade

By Kris Bevill | November 09, 2011

The USDA Economic Research Service has released a 24-page report offering an overview of renewable identification numbers (RINs) and outlining how the RIN market works in relation to the renewable fuel standard (RFS).

The report’s authors suggest that understanding the RIN market can provide insights into the impact of mandates on biofuel and feedstock markets. For example, in 2011 conventional ethanol RIN prices have been low, averaging at about 3 cents between January and August, suggesting that the RFS mandate for conventional ethanol has not been a binding factor for obligated parties. Rather, other factors such as crude oil prices and the Volumetric Ethanol Excise Tax Credit have likely inspired an over-production of ethanol. However, biodiesel RIN prices for the same time period have averaged at around $1.24, implying a more binding biodiesel mandate and a significant impact on biodiesel demand, the authors stated. “A high RIN price suggests that a large gap exists between the supply price that biodiesel producers need to cover the cost of producing the required amount and the demand price that fuel blenders would be willing to pay for the quantity without the mandate,” the authors wrote. “In contrast, the positive but low RIN price for conventional ethanol may reflect the speculative component and/or transaction cost.”

Speculators registered with the U.S. EPA are allowed to buy and sell RINs, which means they can also hold RINs to sell the following year if they anticipate a widening gap between supply and demand. Registered parties are allowed to roll-over or trade up to 20 percent of their RINs to the following year. However, unused RINs expire after 2 years.

The USDA’s baseline projections suggest that conventional ethanol RIN prices will likely remain low through 2012 as more ethanol is consumed than mandated by the RFS. For the time period of 2013-2019, the agency predicts that consumption will not meet the RFS, which suggests that RIN prices will be driven higher. This would also likely impact the corn market. By 2020, the market is expected to once again consume more than the mandated total of conventional ethanol. However, these predictions assume that the 45-cent per gallon VEETC and 54-cent ethanol import tariff remain in place. If the tax credit and import tariff are allowed to expire at the end of 2011, as is currently expected, the demand for conventional ethanol will drop as blenders will have less incentive to consume more than their mandated share of the product, resulting in an increase of RIN prices. Conversely, the authors stated that if the import tariff is removed, Brazil could contribute more sugarcane ethanol to the advanced biofuel portion of the RFS, reducing the demand for those types of RINs.

The authors noted that there are currently no cellulosic biofuel RINs available. The EPA issued waiver credits in 2010 and 2011 for obligated parties to purchase, which cannot be traded or rolled over and may also not be used to meet the advanced biofuel or total RFS requirements. The agency offered no prediction for cellulosic RIN prices for the coming decade.