Smaller crop, same ethanol production?

The declining state of this year’s corn crop has prompted new calls for elimination, or at least a modification, of the Renewable Fuels Standard (RFS), which currently mandates 15.2 billion gallons of renewable fuels going into the nation’s fuel supply this year, most of that from corn. On Thursday, Congressman Bob Goodlatte (R-Va.), who serves as vice chairman of the House Agriculture Committee, introduced a bill that would allow flexibility in the RFS based on corn supplies.

Goodlatte and economist Thomas E. Elam, president of FarmEcon LLC, discussed the proposed legislation and the impact of the RFS on food and fuel prices in a news conference sponsored by livestock and meat groups including NCBA and the American Meat Institute.

At the heart of the problem is that as this year’s corn crop shrinks daily, the mandate for ethanol production doesn’t. About 40 percent of this year’s corn crop will go toward ethanol production to meet that standard, perhaps more as yield estimates decline. By 2022, the RFS target expands to 36 billion gallons.

Goodlatte’s Renewable Fuel Standard Flexibility Act would link the amount of corn ethanol required for the RFS to the amount of the U.S. corn supplies, using a formula based on the ratio of corn stocks to expected use. He says if the policy were in place now, it would trigger a 25 percent reduction in the RFS.  Separately, Goodlatte also introduced the Renewable Fuel Standard Elimination Act which would eliminate the RFS altogether.   
“The federal government’s subsidization of the ethanol industry has quite frankly created a domino effect that is hurting consumers,” Goodlatte says. “With the increased use of food and feed stocks diverted for ethanol, the higher cost for these crops is passed on to livestock and food producers.  In turn, consumers see that increased price reflected on the price of food on the grocery store shelves.”
Following Goodlatte in the news conference, Elam discussed his new report titled “The RFS, Fuel and Food Prices, and the Need for Statutory Flexibility.”

Elam’s research indicates that corn-based ethanol blending requirements have destabilized corn and ethanol prices by offering almost risk-free, guaranteed demand to the ethanol industry while other corn users bear a disproportionate share of market and price risk.

Increases in ethanol production since 2007 have made little, or no, contribution to U.S. energy supplies, or dependence on foreign crude oil, he says. Instead, those increases have pushed gasoline supplies into the export market.

Key points of Elam’s report include:

• Corn price volatility has more than doubled since the 2007 increase in the RFS, while food price inflation relative to all other goods and services accelerated to twice the rate from 2005 to 2007.
• Post-2007 higher rates of food price inflation are associated with sharp increases in corn, soybean and wheat prices.
• On an energy basis, ethanol has never been priced competitively with gasoline.
• Due to its higher energy cost and negative effect on fuel mileage, ethanol adds to the overall cost of motor fuels. In 2011 the higher cost of ethanol energy compared to gasoline added approximately $14.5 billion, or about 10 cents per gallon, to the cost of U.S. gasoline consumption.
• Using four different measures of gasoline prices and oil refiner margins, from 2000 through 2011, there was no statistically significant effect of increased ethanol production on gasoline prices or oil refiner margins.
• According to all four models, factors that do account for gasoline prices and refining margins include crude oil prices, crude oil inventories, gasoline inventories, net gasoline exports, seasonality, and supply disruptions caused by hurricane Katrina, refinery outages, and methyl tertiary butyl ether gasoline additive withdrawal.
• In the U.S., the increase in ethanol production from January 2007 through February 2012 had no effect on gasoline production, crude oil imports, crude oil consumption or refinery utilization.
• During that same time, increased ethanol production displaced gasoline in the U.S. fuel supply, but did not cause reduced gasoline production. The displaced gasoline was exported.
• Declining U.S. oil imports are being caused by increased U.S. crude oil production and higher refinery yields, not increased ethanol production.

Elam says adoption of market-based adjustments to the RFS would not affect U.S. fuel supplies, but would reduce the volatility and level of corn prices to the benefit of both food and fuel producers.

The Elam study was funded by the American Meat Institute, California Dairy Inc., the Milk Producers Cooperative, the National Cattlemen’s Beef Association, the National Chicken Council, the National Pork Producers Council and the National Turkey Federation.

Elam’s report and a slide presentation are available on the FarmEcon website.

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