Waiver’s impact remains uncertain — study

Source: Amanda Peterka, E&E reporter • Posted: Friday, August 17, 2012

The effects of waiving the federal corn ethanol mandate are far from certain and will depend largely on how much incentive refiners have to produce less ethanol, according to a study released today by Purdue University economists.

If the price of ethanol remains lower than gasoline as it is today and refiners lack the technical capacity to quickly change their operations, then a waiver would have little to no effect on ethanol production, the researchers said. The impact would likely vary from refiner to refiner and from region to region, they said.

“For there to be impacts, blenders need to have possible economic incentives,” said Wally Tyner, an agricultural economist at Purdue. “It needs to be in their interest to reduce ethanol.”

The analysis was conducted in response to requests from four livestock-state governors that U.S. EPA provide at least a partial, one-year waiver of the yearly corn ethanol mandates under the federal renewable fuel standard. In their petitions, the governors said the requirements have squeezed corn supplies, driving up the cost of corn used by livestock producers as animal feed (Greenwire, Aug. 15).

The economists did not judge whether EPA should waive the ethanol requirements but instead plugged various scenarios of gas prices, corn prices, refiner flexibility, carry-over renewable fuel credits and corn yields into simulations.

Regardless of the renewable fuel standard and unless the market dynamics change, most refiners will probably continue blending ethanol at the same level for the rest of 2012 because it is economically attractive, the study found. There are also currently no financial incentives for refiners to use fuel credits that they have saved from previous years to meet the standard this year.

The “real question,” the economists write, is what will happen in 2013, when the federal corn ethanol requirements rise from 13.2 billion gallons to 13.8 billion gallons.

If corn prices remain high, crude oil remains less than $100 a barrel and there is limited flexibility for refiners to change their process, then the waiver will have little impact next year. There could be a significant impact, however, if corn prices remain high, crude remains at $100, carry-over credits are used to meet the standard and refiners have flexibility to change their processes.

If crude rises to more than $120 a barrel, the impact will likely be small regardless, the authors found.

Taking into account all factors and various drought conditions, a waiver would reduce the cost of corn anywhere from $0 to $1.30 a bushel, the study found. Carry-over fuel credits by themselves would reduce the price by about $0.67 per bushel.

A study released earlier this week by Iowa State University economist Bruce Babcock found that a waiver by itself would decrease corn prices by $0.58, or by 7.4 percent. Using carry-over fuel credits would provide an additional $1.91 decrease in the price of corn.

Industry reactions

The ethanol industry today touted the reports as evidence that waiving the renewable fuel standard was “unnecessary.”

“Congress and EPA built sufficient flexibilities into the RFS to ensure compliance is achievable even under the most abnormal and extreme circumstances, such as this summer’s drought,” said Bob Dinneen, president and CEO of the Renewable Fuels Association. “These studies recognize the impact of that built-in flexibility and show that a waiver would not significantly contribute any additional further relief from drought-induced high corn prices.”

But livestock industries say the reductions in the corn price from a waiver are not insignificant.

“We’re not talking peanuts here in terms of general economic impact on the pork industry,” said Steve Meyer, president of Paragon Economics and a former director of economics for the National Pork Producers Council. “There’s real money at stake here.

“Most people, when they talk about public policy, they talk about a sense of fairness and some tradeoffs,” Meyer added. “So far, the livestock industry has basically done all the giving here and the corn and ethanol business has done all the taking in this policy” since its creation in 2007.

But there are still several uncertainties, and EPA will have to take a careful look before deciding on a mandate one way or the other, the authors of the Purdue study said. The decision is complicated, they said.

“EPA needs to do, and I’m sure they will, a very thorough assessment on this issue,” Tyner said. “If there’s no flexibility, if we’re sort of locked into the current technology, or if economically we’re locked in, then any waiver decision is more symbolic than anything else.”

EPA has 90 days to respond to the waiver petitions once the agency posts notices that it acknowledges receipt of the requests, which it has yet to do.

In a webcast today on the study, the authors also warned a waiver could lead to unintended consequences. Chris Hurt, an author and a Purdue agricultural economist, raised the possibility of a waiver causing “demand destruction” in the long run.

If the country returned to normal corn production but demand was driven down because of the waiver, then corn prices could see the biggest drop ever next year because of the overabundance of supply, Hurt said.

What was clear from the analysis is that putting a waiver on the corn ethanol mandate is not a “stroke of the pen” solution that would immediately change the market for ethanol, as some editorials have suggested, Tyner said.

It is also clear EPA’s actions cannot reverse the billions of dollars in damage the drought has already caused.

“In considering a waiver, EPA cannot change the loss, but can only redistribute it among the affected parties — ethanol producers, livestock producers, corn growers and ultimately domestic and foreign consumers,” the study says. “To the extent that the refining and blending industry has flexibility, issuing a waiver helps livestock producers and livestock product consumers, and it hurts ethanol producers and crop growers.”