Thursday, July 19, 2012

USDA May Be Overestimating Corn Needed For Ethanol by 10%

And here I was about to fire off a letter to the President asking for an Executive Order rescinding the
EPA's mandate that we use up 5 Billion bushels to make hooch.
From Reuters via CattleNetwork:
As corn burns, excess ethanol credits help dampen demand 
As drought devastates the U.S. corn crop, relief from near-record prices may come from an unexpected quarter: oil companies, which may buy less ethanol than their government mandate suggests.

With a 50 percent surge in corn prices stirring fears of global food inflation and threatening to revive the debate over using crops for fuel, traders are zeroing in on a little-known niche of the ethanol business known as Renewable Identification Numbers (RINs) that may help ease the pressure on corn.

In essence, RINs are certificates used by refiners or fuel companies to demonstrate they are meeting their government mandate to use a set amount of renewable fuel every year. Each RIN is a unique 38-character code that is assigned by an ethanol producer to each gallon or batch of fuel. When the fuel is sold to an oil company that blends the ethanol with gasoline, the RIN can then be "retired" to regulators, or sold on the market.

But they also serve a second function as a kind of relief valve in the event of a one-off crop crisis or price spike: if an oil company buys more ethanol than its minimum quota, it can keep about a fifth of those credits to use the next year.

While the mechanics of the RIN market can be dizzyingly complex, the upshot is simple: Oil firms with surplus RINs could use those paper credits in lieu of buying physical ethanol next year, ultimately reducing demand for corn to make the fuel.

Because the role of RINs is not widely appreciated, some say the U.S. Department of Agriculture (USDA) may be overestimating corn-for-ethanol demand by as much as 10 percent.

"The general view is that there is a floor, or a minimum, for demand for corn for ethanol," says Nick Paulson, an assistant professor in the University of Illinois' agriculture and consumer economics department, who wrote a paper on RINs in March that has become required reading for grain traders...MORE