Stockpiled RINs hold potential to reduce corn demand

By Kris Bevill | March 21, 2012

A recent analysis published by the University of Illinois agricultural and consumer economics department suggests that while the U.S. renewable fuel standard (RFS) mandate for corn ethanol implies greater demand for corn in 2012 compared to the previous year, actual demand could be up to 20 percent less than the mandate requires due to a banking provision in the renewable identification number (RIN) trading systems.

Nick Paulson, assistant professor at the University of Illinois and author of the paper, explains that while parties often cite the RFS as reason to remain bullish on corn supplies, the potential exists for corn demand to be less than expected due to a stockpile of RINs. “If anything affected the favorable blend margins that we’ve seen in terms of blenders wanting to blend as much ethanol as possible, because we’ve built up a bank of RINs, the mandate is essentially lower than what the mandate level truly is,” he said. The U.S. EPA allows obligated parties to bank or borrow up to 20 percent of each year’s required RINs. Paulson noted that more RINs have been created each year than have been needed for compliance since the RIN system was established in 2007. While the 2012 RFS for conventional ethanol is set at 13.2 billion gallons, Paulson estimates that up to 2.5 billion gallons of the mandate could be met with banked RINs rather than new gallons of ethanol, thus lowering the expected corn demand by nearly 1 billion bushels.

Of course, a number of conditions would likely have to occur before blenders are inspired to use their stockpiled RINs for 2012 compliance. A short corn crop or declining energy prices could both be factors in that decision, according to Paulson. He doesn’t expect the expired 45-cent-per-gallon blenders credit to have a significant impact on the scenario, however. “Looking at the blend margins so far this year, even without the credit, it’s been pretty profitable for fuel blenders to use as much ethanol as they can,” he said. “But it definitely does take away part of that margin that fuel blenders had been able to capture.”

Another side effect of RIN stockpiles is low prices, Paulson said, noting that the average trading price of conventional RINs in 2011 was just 0.5 cents per gallon last year, compared to 1.6 cents per gallon in 2010.