Studies Explore RFS

Published in DTN

OMAHA (DTN) -- Now that EPA is forced to consider a possible waiver of the Renewable Fuels Standard in light of a drought-induced short corn crop, several economists have been trying to get a handle on what might happen if at least a partial waiver is granted.

A number of recent studies from experts at Purdue University, Iowa State University and the University of Illinois paint different scenarios depending on what EPA decides to do with the 13.2-billion-gallon RFS for 2012.

Wally Tyner at Purdue said in a new analysis that although renewable identification numbers, or RINS, offer flexibility in meeting RFS requirements, economics more likely will win the day. RINs are credits that can be used by obligated parties to meet their volume obligation each year.

In "Potential Impacts of a Partial Waiver of the Ethanol Blending Rules," Tyner said some RINS could be used in 2012 with the remainder applied to 2013.

"However, for a number of reasons, most blenders will probably continue blending ethanol at the same 10% rate in 2012 unless the ethanol price surpasses gasoline by a big margin, which seems unlikely in 2012," he said.

Currently there are no financial incentives for blenders to use RINS to meet RFS obligations if the ethanol price is below the price for reformulated blendstock for oxygenate blending (RBOB) gasoline, Tyner said. In recent weeks, ethanol prices have been 25 cents to 40 cents below RBOB, he said in the analysis.

Another recent analysis by ISU ag economist Bruce Babcock looks at three possible scenarios that include a full RFS mandate of 13.6 billion gallons, use of 2.4 billion gallons of RINS, and a full waiver.

Babcock's study finds that there would be little effect seen in granting an RFS waiver.

The difference in corn price between the full mandate and the flexible mandate would be about 91 cents per bushel for the 2.4 billion gallons use of RINS, and 67 cents for a 2-billion-gallon RINS usage, the study said.

Scott Irwin and Darrell Good from the University of Illinois said in a recent analysis that the use of carry-forward RINS would result in no effect on corn price.

Reducing blending to 11.8 billion gallons reduces corn price between 66 cents and 68 cents per bushel depending on the severity of the drought, according to the Purdue analysis.

Moving to 10.4 billion gallons of production reduces corn price an additional 44 cents to 47 cents per bushel, the study said. Going to about 7.8 billion gallons from 11.8 billion gallons would reduce the corn price by $1.31 to $1.34 per bushel.

"The bottom line: if refineries and blenders have flexibility to reduce ethanol usage in the short term, use of prior blending RINS credits and/or a waiver could reduce corn price around $1.30 per bushel for a large waiver or 47 cents per bushel for a modest waiver," the study said.

EPA WAIVER REQUESTS

The governors of Arkansas, North Carolina, Delaware and Maryland have requested RFS waivers, starting an automatic process that will require EPA action.

EPA posted a notice in the Federal Register on Monday opening up a 30-day public comment period on the waiver request from the governors. http://dld.bz/…

Ethanol industry groups have said there is no need to waive the RFS because obligated parties including blenders will be able to meet their blending obligations with existing ethanol supplies and with an estimated 2.4 billion to 2.6 billion gallons' worth of RINS.

If the price of corn continues to increase as U.S. drought continues, and ethanol prices surpass gasoline by a "significant margin, blenders may not have an economic incentive to blend ethanol," Tyner said in the study.

There has been an 8% fall in ethanol production over the past seven weeks, the study said, as higher corn prices have put pressure on ethanol margins.

The RFS requires blenders to use 13.2 billion gallons of ethanol in 2012 and 13.8 billion gallons in 2013. The remaining 2012 obligation is about 5.6 billion gallons.

"Some technical constraints in ethanol blending could keep ethanol demand from falling quickly," Tyner said in the analysis. "If ethanol demand falls, it would be a slow reduction rather than an abrupt change. We do not think EPA will issue a waiver for 2012."

RFS SCENARIOS

The Purdue study offers a number of RFS-related scenarios.

For example, if the season average corn price is about $8 or higher and crude oil remains at $100 or lower, then reducing the RFS could reduce the demand for ethanol and the demand for corn, Tyner said.

"However, the market response to a waiver is very hard to predict," he said.

"If the waiver resulted in less demand for ethanol, that would in turn lead to less demand for corn and a lower corn price. More ethanol plants may close or operate at less than full capacity, at least temporarily."

It remains unclear how quickly the fuel industry could adjust to life without ethanol or if it would be economically feasible. "In other words, for technical and economic reasons, the waiver could have little or no near-term impact, but it is hard to predict how refineries and blenders would respond," Tyner said.

If the corn price hovers around $8 and crude oil increases to about $120, "waiving part of the RFS would have little impact because ethanol likely would be demanded by the market regardless of the level of the RFS," he said. Refiners then would have less incentive to convert operations to a lower ethanol blend with a higher crude price.