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Dr. Wallace Tyner presented corn-ethanol waiver scenarios to chicken producers.
Whether or not there will be a waiver in 2013 of the Renewable Fuel Standard for ethanol produced from corn is to be decided by the U.S. Environmental Protection Agency by November 13.
“There is not going to be enough corn to go around in 2013 in terms of prior consumption rates. So there is a lot of rationing that is going to have to go on. That’s what this whole discussion about a waiver is about,” said Dr. Wallace Tyner, professor, Department of Agricultural Economics, Purdue University.
Meantime, the nation’s poultry and livestock producers, the corn producers, ethanol producers, various state governors and others with economic interests press their cases for or against a waiver. Some economists are saying, however, that the decision about a waiver might not matter much to the competing interests.
Blenders will act in their self interest
Tyner said that even if a waiver were to be granted in 2013 it might be of little or no economic help to poultry producers who are suffering greater harm than any other food production group from the high corn prices brought on by this summer’s drought.
In an October 11 presentation at the National Chicken Council, Tyner noted that the price of the gasoline purchased by ethanol blenders was $2.95 a gallon and the price of ethanol was $2.35 a gallon. Tyner’s point: As long as ethanol is cheaper than gasoline, blenders have an incentive to use it in their gasoline formulations – whether or not there is a waiver of the Renewable Fuel Standard.
Uncertainty about a waiver’s impact
To be clear, Tyner did not say that there would be no economic relief for corn users if a waiver of the RFS were granted. The results can’t be predicted with certainty. For one thing, the economics that drive blending decisions vary from region to region in the U.S., from blender to blender and even by season of the year. What’s more, the price spread between ethanol and gasoline blending stock is constantly changing. For example, the 60-cent spread between ethanol and Reformulated Gasoline Blendstock for Oxygen Blending has narrowed to 25 cents today due to falling crude oil prices.
Another variable is the existence of Renewable Identification Numbers. Blenders can use surplus credits from prior-year blending to meet the current year RFS. It is estimated that blenders have about 2.6 billion gallons of such prior-year credits.
Purdue researchers studied economic scenarios
It is not clear what impact a waiver would have, according to a recent study by Tyner and fellow researchers at Purdue. At the National Chicken Council meeting, Tyner explained various scenarios.
“The different scenarios depend on what happens to the crude oil price and the corn price and to what extent the blenders and refiners have technical flexibility and to what extent would they choose to use whatever economic flexibility they have. In some cases, the waiver would do nothing or very little. In other cases a waiver would have a significant impact,” he said.
Their economic assessment involved different levels of ethanol supply reduction:
Simulations of three corn production levels
The following three corn production levels were evaluated in the study:
Economic simulation of the impact of a waiver
“I don’t think anybody knows the extent to which oil refiners and blenders have the flexibility to change their production or blending operations or the extent to which they would use the flexibility. However, the following are the estimates from our economic simulation which was conditioned on their having flexibility and using it,” Tyner said.
“If refiners and blenders have flexibility and use it, the partial waiver impact could be up to $1.34 per bushel for a large waiver and $0.47 per bushel for a small waiver,” he said.
Will a waiver be issued for 2013?
The smart money says the issuance of a waiver by EPA is a long shot at best. Tyner, however, is more circumspect in his assessment.
“The way the law reads, the waiver could be granted if there’s the determination of economic harm done that can be remedied by the waiver. Then they would be in the condition where a waiver could move around or share the economic harm that has been done by the drought. If EPA makes that determination, it might well issue a waiver,” he said.
More crucial issues for corn users
Issues more crucial than a waiver may soon face the poultry and livestock industries. Currently, the RFS mandates that gasoline contain 10 percent ethanol up to 13.2 billion gallons. In 2013, the mandate rises to 13.8 billion gallons, and in 2014 it rises to 14.4 billion gallons before reaching 15 billion gallons in 2015. Therein, are potentially more serious challenges for corn users: What changes may occur in the RFS in the future?
For example, will declining gasoline usage in the face of the RFS mandates lead to the adoption of E15 (or higher) gasoline blends? Currently, U.S. gasoline consumption is 133 billion gallons annually. Ten percent of that consumption is only 13.3 gallons. Would EPA accommodate that by lowering the RFS mandate because it can’t be reached by blending ethanol at a 10 percent rate? Or would higher ethanol blend rates become more prevalent or even mandated?
Solving the blend wall issue
Poultry industry economist Dr. Paul Aho has proposed a compromise between food and ethanol producers as they approach a potential impasse over the blend wall.
“A possible compromise for the next several years between those in favor of increases in corn ethanol production and those opposed to such increases would be to allow the 10 percent blend wall to supersede the RFS mandate.” And what about the RFS mandate for cellulosic ethanol? When it isn’t met, will the ethanol industry push for making up the short-fall with corn ethanol?
Under such scenarios, the percentage of U.S. corn production dedicated to ethanol production might one day be well over the 42 percent that already causes such consternation among food producers. Some analysts are urging food producers to go to work now to try and prevent this from ever happening.
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