Wednesday, August 22, 2012

Effects of a U.S. EPA Ethanol Waiver on the Price of Corn

From Roger Pielke (Jr.):

A US Ethanol Waiver and the Price of Corn

UPDATE: At The Washington Post Brad Plumer does a fantastic job explaining the Purdue/FF paper discussed in this post.

Today's FT says this in an editorial:
Passed by Congress in 2005, the Renewable Fuel Standard mandates fuel refiners to blend rising volumes of ethanol and other biofuels. For American farmers, the RFS has been spectacularly effective. Ethanol is expected to consume about 40 per cent of this year’s US corn crop...

In the short term, the Environmental Protection Agency has the ability to issue a waiver to the RFS if implementing it would “severely harm” the economy or the environment. The present conditions amply meet that requirement.

The biofuels industry argues, rightly, that the effect of waiving the RFS might not be immediate or dramatic. Refiners will still need large volumes of ethanol to meet fuel quality standards, so production would not dry up overnight.

RFS requirements can also be met using the tradeable credits known as Renewable Identification Numbers, issued when ethanol is produced. Because there is a substantial backlog of those credits, refiners can use them to meet their obligations rather than demanding physical ethanol, again blunting the effect of an RFS waiver.

Ethanol producers also point out that if output does fall, it will cut the supply of distillers’ grains, the protein-rich byproduct used as animal feed, so increasing demand for other crops such as soya.

Nevertheless, suspending the RFS would probably help ease corn prices – next year more than this. It would also send a signal that the US is not prepared to crucify mankind upon a cross of corn.
But what effect on corn prices might be expected from a waiver of the RFS? Academics at Purdue University affiliated with the US Farm Foundation have tried to answer this in a paper just out (here in PDF).

They explain their quantitative analysis as follows...MORE