In preliminary rule making for 2014 announced on Nov. 15, the U.S. Environmental Protection Agency proposed to effectively reduce the mandate for renewable biofuels (primarily corn-based ethanol) in 2014 from the statutory requirement of 14.4 billion gallons to 13 billion gallons.
“Some have interpreted this to mean that, if implemented, the rules would result in less corn consumption for ethanol production during the current marketing year than would have otherwise occurred,” Good said. “That may or may not be the case. Without a change in the rules, blending of ethanol in the domestic motor fuel supply during the 2013-14 corn-marketing year would still have been limited by the 10 percent blend wall and consumption of relatively small quantities of higher blends. Domestic consumption would have been well short of 14.4 billion gallons and maybe less than 13.3 billion gallons.
“The proposed change in the RFS mandate does not necessarily substantially alter prospects for domestic ethanol consumption during the current corn-marketing year,” Good added. “However, as pointed out two weeks ago, domestic ethanol consumption and production will be influenced by factors beyond the mandate. In particular, consumption will be influenced by the extent to which mandates are met with physical blending versus the use of Renewable Identification Numbers (RINs) stocks. Those decisions will be influenced by the EPA’s final 2014 rule making and by the perceived risk that the rules could be successfully challenged in court,” he said.
Good said that obligated parties may choose to retain RIN inventories until these issues are sorted out. “Ethanol production will also be influenced by changes in stocks of ethanol and by the magnitude and direction of net-ethanol trade. With stocks at a four-year low, further reductions may be small. U.S. ethanol is also expected to experience a positive trade balance in the year ahead. Taken together, these factors suggest that prospects for corn consumption for ethanol production are still near the 4.9 billion bushels projected by the USDA.
“Without a meaningful increase in the U.S. production estimate in January, corn prices appear low enough to encourage the increase in consumption made possible by the large 2013 crop. U.S. corn is competitive in the world market, domestic livestock production has been returned to profitability, and ethanol production margins are large,” Good said. “As a result, export and export sales have accelerated, domestic livestock production is expanding, and ethanol production has rebounded. The corn market appears to be functioning as needed, with one exception. The large carry in the futures market price structure encourages carrying unneeded inventory into the next marketing year and also encourages producers to maintain large corn acreage in 2014,” Good said.