ANALYSIS: Mess with RFS and the world’s corn industry will feel it
President Trump’s decision to delay discussion on reforming the US flagship biofuel policy, the Renewable Fuel Standard (RFS), has kicked the controversial issue into the long grass, for now, but any adjustments could have a sweeping impact on not just the US corn market, but the global one too.
The RFS lays out a plan to provide 36 billion gallons of biofuels into the US road fuel mix by 2022, with current mandates calling for 15 billion gallons of conventional biofuels to be blended in 2018.
The vast majority of that comes from the US ethanol industry – with the RFS a key plank in providing the long-term vision that has facilitated the industry’s growth, to the point where the sector is expected to consume 5.575 billion bushels (141 million mt) of US corn production.
That’s just over 38% of total US corn production.
That’s one reason why senators from the nation’s corn belt on Monday urged the President to call on the Environmental Protection Agency to stop issuing waivers to some of the nation’s largest refiners that allows them to escape blending obligatons.
The waivers were meant to help struggling refiners, but have since been issued to organization that are highly profitable, such as Andeavor.
Brouhaha
Yet while most of the brouhaha has been focused on the domestic impact, the implications for the corn market are global, as any effort that results in lower mandates or a less rigorous compliance regime would have a displacement effect both for corn and finished grade ethanol.
“This will add exportable surplus from the US and strengthen existing competition for consumers in the Middle East and Southeast Asia region, where Ukraine already competes with the Americas,” one Black Sea source said.
Analysts have cited the RFS as a major supporting factor in corn prices, with some estimating the guaranteed demand from the biofuels programme adds about 20% to the value of a CBOT bushel of corn – roughly $0.77/bu at current prices.
“If the US stops its ethanol program… the futures market would move lower, spreads stay wide, domestic freight eases and premiums decline at the Gulf and we do bit more exports,” a US-based market source said, but there are mitigating circumstances that make wholesale dismantling of the programme difficult.
Oxygenate
Ethanol acts as an oxygenate and enables petrol to burn more cleanly thus reducing emissions.
As such, there are a handful of alternatives to ethanol consumption in fulfilling that role, meaning ethanol has a place in the overall blend.
But exactly how the RFS could be reformed will be key, particularly if it adjust the mandate, which is currently that of a 10% blend – E10.
The USDA or EIA have yet to respond to Agricensus requests for comment, but media attention has focused on a potential cap on the price of the renewable identification number (RIN) – a certificate that obligated fuel suppliers can buy in order to meet their compliance.
A recent report from Iowa State University suggested capping RIN prices at between $0.10 to $0.20/cents would carve 700 million gallons off ethanol demand, amounting to approximately 250 million bushels of US corn demand – or 6.3 million mt that would need to be stored or exported.