Op-Ed: Biofuel policy adds to agricultural market uncertainty

Source: By Pat Westhoff, Columbia Tribune • Posted: Monday, May 21, 2018

When a new farm bill is up for debate, it is usually the top source of policy-related uncertainty for farmers and agricultural markets. This year, it might not even make the top two.

Ongoing trade negotiations and disputes have garnered a lot of attention in the farm press. New tariffs on U.S. farm products, for example, could reduce U.S. agricultural exports and commodity prices. Decisions made by trade negotiators may have multi-billion dollar effects on farm income. Biofuel policy decisions also have the potential to have large impacts on commodity markets and farm income.

Most cars in this country run on a blend of 90 percent gasoline and 10 percent ethanol. At current gasoline consumption levels, that requires around 14 billion gallons of ethanol. More than 5 billion bushels of corn — over a third of the nation’s corn crop — is made into ethanol and a co-product livestock feed. Oil refiners, car manufacturers, filling stations and car drivers have all adapted to 10-percent ethanol blends. Even if current policies were to change, there are good reasons to expect that most cars would continue to use the same fuels they use today. However, that is not the same thing as saying that biofuel policies no longer matter.

The renewable fuel standard (RFS), created as part of 2007 energy legislation, continues to be important in determining which fuels are produced and used, and at what cost. The RFS is a very complicated set of regulations that effectively set a floor level of domestic use of ethanol and biodiesel. Each year, the Environmental Protection Agency (EPA) is required to set the various components of the RFS, subject to statutory guidelines.

For 2018, up to 15 billion gallons of corn-based ethanol can be used to satisfy the RFS. That is a little more than the amount of ethanol required to run all of the nation’s cars on a 10-percent ethanol blend. In the current biofuel policy debate, ethanol and corn producers do not want to see any relaxation of RFS rules and would like EPA to approve the year-round use of E-15, a fuel containing 15 percent ethanol. Oil refiners, on the other hand, want to reduce their cost of complying with the RFS. Waivers that exclude small plants from RFS requirements or that count exported ethanol towards the RFS targets both have the effect of reducing the amount of ethanol that has to be used in this country.

If oil refiners and their allies prevail, prices for ethanol and corn will fall. Even if the quantities involved are relatively small, corn price changes could be noticeable. Lower corn prices would reduce income for crop farmers, reduce feed costs for livestock producers, and increase the budgetary cost of certain government farm programs that increase payments to farmers when prices fall. As with trade policy changes, it is possible to imagine biofuel policy scenarios that could raise or reduce farm income by hundreds of millions or even billions of dollars. Those effects could be larger than the change in farm income that might result from a new farm bill, especially if farm policy changes are as modest as expected in any new legislation that might be approved by Congress and signed by the President.

Pat Westhoff is director of the Food and Agricultural Policy Research Institute at the University of Missouri and a professor of agricultural and applied economics.