CARD analysis considers outlook for RINs in 2013, 2014
Iowa State University’s Center for Agricultural and Rural Development recently published a policy brief on the outlook for ethanol and conventional biofuel renewable identification numbers (RINs) through 2014. The brief was written by economics professor Bruce Babcock and focuses whether the supply of banked RINS will be used in 2013 to offset high production costs, or in 2014 to help offset low ethanol prices.
In his analysis, Babcock stresses that when the cost to an obligated party to use a banked or purchased RIN to meet its volume requirements under the renewable fuels standard (RFS) is less than the value lost from buying ethanol, that party will use RINs to meet its obligations, rather than actually buying ethanol. Babcock said this will have two effects on the market: ethanol use will decline and the increased use of RINs will increase their price. If enough obligated parties turn to banked RINs, the purchase price of ethanol will eventually be reduced, increasing the use value of the fuel. These impacts will continue until the value loss from using ethanol decreases to the point that obligated parties are indifferent to purchasing ethanol or using banked RINs.
Regarding the expected production costs for ethanol, Babcock said that while the 2012 drought pushed corn prices higher, increasing the cost of producing ethanol from most of 2013, unless another drought occurs, corn and ethanol production prices are expected to be reduced following the 2013 harvest.
However, corn prices are just one of the factors impacting the U.S. ethanol marketplace in the short-term. According to Babcock’s analysis, the ability of the U.S. to consume ethanol in 2013 and 2014 is expected to be severely constrained by the E10 blend wall.
He also specifies that the demand curve used by the U.S. EPA last fall when it denied a request to waive the 2013 for corn ethanol, if proven accurate, shows that there is no price at which either the 2013 mandated volume of 14.6 billion gallons or the 2014 mandated volume of 16.2 billion gallons can be met with ethanol. However, there are alternative ways of meeting these mandates, including the use of sugarcane ethanol to meet the advanced biofuel mandate. Babcock also points out that it is possible that the demand curve is not an accurate reflection of what will happen to ethanol demand if the price of the fuel drops enough. For example, low ethanol prices could motivate flex fuel vehicle owners to use high ethanol blends. It is also possible, he said, that regulatory and legal hurdles could be quickly overcome, allowing for more E15 sales.
According to Babcock, owners of banked RINs will use them when they have their greatest value. “This principle implies that RINs will be used in 2013 until their 2013 value is equal to their expected value in 2014,” he said in the brief, noting that a significant portion of these banked RINs are expected to be used this year, due in part to the E10 blend wall and high ethanol production costs. However, the actual use of banked RINs will be highly dependent on this year’s corn yields, the use of sugarcane ethanol to meet RFS advanced biofuel targets, and the biodiesel mandate.
A full copy of the analysis, titled “Outlook for Ethanol and Conventional Biofuel RINs in 2013 and 2014,” is available for download on the CARD website.