The Impact of an Ethanol Blending Waiver on Oklahoma
Phil Kenkel
Bill Fitzwater Cooperative Chair
The drought in the U.S. Corn Belt is projected to reduce corn production by over 25% relative to pre-season estimates. The Chicago Board of Trade corn contract price have increased from $5.16 in June to $8.25. Approximately 40% of the projected U.S. corn harvest will be used for ethanol production and this demand is supported by renewable fuel standard provisions that mandate the use of corn based ethanol by petroleum refiners. This situation has raised questions over the impacts of a temporary waiver of the renewable fuel standard at the national level. Governors of North Carolina, Arkansas and Georgia have submitted formal waiver requests which EPA has 90 days to consider. Producers and agribusiness operators in many other states are curious as to the effects of a waiver.
A key question is whether a waiver of the RFS would change the demand for ethanol. In the absence of a mandate, ethanol demand is based on its value as a petroleum replacement, its value as an additive and its value as an octane enhancer. Ethanol’s value as a petroleum replacement depends on the price of corn and crude oil. At high crude oil prices ethanol can continue to be cheap relative to gasoline and a waiver of the RFS would have little impact. The demand for ethanol as an octane enhancer depends on the flexibility of refiners to tweak their processes. Many refiners currently produce 84 octane gasolines which is blended with ethanol to achieve a 87 octane product. The potential impact of a waiver of the RFS also depends on the flexibility of refiners to change their blends of gasoline and ethanol. The mandate is also implemented through a system of ethanol credits (RINS) which can be banked from year to year. The degree to which refiners could reduce ethanol use and cover their obligation with stockpiled RINs is also uncertain.
Because of these factors estimates of the impact of a RFS waiver on corn prices vary over a wide range from as low as $0.35/bu to over $1.00/bu. The impact of a national waiver of the corn based RFS on Oklahoma would obviously depend on the corn price impact. To the entent that a waiver reduced corn price, corn and sorghum producers who did harvest a crop would be negatively impacted. Oklahoma’s livestock sector would benefit, particularly hog and poultry that use a high portion of corn in their rations. The price of DDGs would increase, which would create upward pressure on the protein feed. Wheat prices would likely follow corn downward, negatively impacting wheat producers while soybean and canola prices could see some upward price movement due to their feed meal value.
The major factor impacting corn prices is the drought. The ethanol blending mandate pushes most of the demand adjustment into the feed and export sectors. A waiver of the mandate could in no way offset the impact of the drought. It could have some impact on the distribution of the effects. Some analysts have maintained that the renewable fuels standard is poorly structured and that the ethanol production mandate should be linked to corn stocks. This year is likely to add fuel to that debate.
8-22-2012