Wall Street role in ethanol credits questioned

Source: Written by CHRISTOPHER DOERING, Des Moines Register, Gannett Washington Bureau • Posted: Wednesday, September 18, 2013

WASHINGTON — Special credits associated with ethanol may have attracted the interest of major Wall Street firms that are responsible for driving prices higher, an allegation Iowa lawmakers said Monday may need to be investigated.

Congress created Renewable Identification Numbers (RINs), special serial numbers given to batches of biofuels before they are sold to refiners and gasoline importers looking to comply with a federal mandate to use a certain amount of ethanol. In exchange for not blending ethanol, the refiner can choose to purchase RINs.

The New York Times published a front-page story Sunday about concerns that Wall Street has exploited the ethanol credits, leading to price spikes. Sen. Chuck Grassley, R-Ia., said the allegations of “abuse and exploitation by individuals or firms to generate profits at the expense of refiners, other obligated parties, and maybe consumers are troubling.”

Grassley said if the claims are true, the Environmental Protection Agency, which oversees the country’s renewable fuels program, should work to ensure that the market is operating as Congress intended, and “not as a profit mechanism for Wall Street banks and other financial institutions.”

Investors have increasingly looked to agricultural commodities as a place to make money. In doing so, they have been blamed for driving up the price of commodities such as corn, soybeans and now RIN prices tied to ethanol.

Sen. Tom Harkin, D-Ia., said if “bad actors are undermining” the country’s Renewable Fuel Standard through manipulation, “then we can and should investigate to determine whether action is warranted.”

The Renewable Fuel Standard, created in 2005 and expanded two years later by Congress, requires refiners to buy alternative fuels made from corn, soybeans and other products to reduce the country’s dependence on foreign energy.

Chad Hart, an economics professor at Iowa State University, said RIN credits were viewed by Congress as a way for refiners and others tied to ethanol to comply with the mandate. They did not intend for speculators to get involved in the market.

Early this year, Hart said he and other economists were puzzled by the low prices that RINs were commanding.

“From my perspective a lot of economists looking at this wondered why the RIN prices were so low in 2012, going into 2013. And it looks like traders had the same sorts of debates going on,” said Hart. “There will probably be some investigation to see who all is involved in the markets.”

RIN prices started the year at a few cents, before spiking to above $1.40 in July. They are now hovering at around 60 cents each.

Energy refiners have warned that the impact of RIN credits could be felt by consumers at the pump through higher gas prices.

The head of Valero, the third-largest U.S. corn ethanol producer and the nation’s largest independent refiner, told Senate lawmakers in July that it could cost the the company as much as $800 million for ethanol credits to comply with the mandate.

Bart Chilton, a Democratic commissioner at the Commodity Futures Trading Commission, said the agency was reviewing the recent volatility in the RIN market, though he cautioned that the agency had not launched an investigation.

“I see no reason for the spikes, and we are examining” them, Chilton said. The CFTC, which oversees trading of commodity futures, would have jurisdiction since ethanol contracts are being affected by the credit.

Still, Wall Street firms may only be partially responsible for the volatility in RIN prices.

As motorists drive less and cars become more fuel efficient, less motor fuel with ethanol is used. That means it’s harder for companies to blend as much of the corn-based fuel as they are required to do each year — a problem known as the blend wall.

Because there aren’t enough gallons of fuel available to blend all the ethanol required, refiners are forced to buy these credits to comply with the law, potentially driving up the price.