RFS waiver would have minor effect on corn price in short term

By Holly Jessen | October 08, 2012

An October report from the Food and Agriculture Policy Research Institute concludes that a reduction in the renewable fuel standard wouldn’t greatly reduce corn prices in the 2012/’13 crop year. However, the effects of the waiver could be larger in the next crop year.

The motivation for ethanol use and production is likely to come from crop and fuel market conditions, not the RFS, the report’s four authors wrote. It’s assumed that the shift away from E10 would be slow, meaning rising wholesale prices for ethanol wouldn’t result in lower use of ethanol by blenders—at least when the ethanol price changes aren’t large. “Waiving the mandate, a minimum use requirement, has limited market impact if people were going to use almost as much as the mandate anyway,” the 20-page report said.

The Renewable Fuels Association pointed to one of the report’s scenarios, in which a full waiver of the RFS would reduce corn prices by only 0.5 percent or 4 cents a bushel in 2012/’13. In the same scenario, the corn available for livestock feed increased by 0.6 percent and 1.3 percent less corn may be used for ethanol production. “The new FAPRI study is just the latest in a series of recent reports that show waiving the RFS would not have the types of impacts claimed by the livestock groups and grocery manufacturers,” said RFA President Bob Dinneen in a prepared statement.“The suggestion that an RFS waiver would significantly bring down feed prices and reduce retail meat prices is absolutely absurd. The only real impacts of a waiver would be to discourage farmers from planting corn next spring and to interrupt and delay important investments in new feedstocks and advanced biofuels technologies.”

A waiver could, however, reduce corn prices more in 2013/’14, the report said. Under the current system, if biofuel blending exceeds the amounts required by the RFS that amount can be used to help meet the mandate for the next year. If the RFS is waived in 2012/’13 but that practice is still permitted, it could make it easier to fulfill the RFS the following year. If, however, the waiver disallows that practice, it could be more difficult to meet blending requirements in 2013/’14. “In this case, corn prices in the year after the waiver would be higher than in the baseline,” the report said.

Other key findings from the report were:

- If the advanced mandate were waived, less Brazilian sugarcane ethanol would be imported. That would lead to increased U.S. ethanol production from corn and increased corn prices.

- In general, reducing the use of corn ethanol domestically would tend to increase exports and cutting back on the amount of advanced ethanol that is imported would mean fewer exports.

“The results stress the importance of the mandate hierarchy, delayed impacts that take place after a waiver, trade, and the interactions among biofuel and crop markets more generally,” the report said. “However, there are important uncertainties about market behavior in the future, particularly about ethanol use, RIN rollover, and reconciling marketing year and calendar year information.”