This year’s severe U.S. drought —the worst in five decades—not only shriveled crops and sent the price of produce soaring at grocery stores nationwide; it also threatens to cut America’s growing ethanol industry off at the knees, or more appropriately, off at the ears. As a result, a battle continues to be waged between two groups that usually work together, environmentalists and renewable energy producers, about what’s more important—the cost of food or global competitiveness of the biofuels industry.
Indeed, according to the latest issue of the “Weekly Tanker Opinion,” published by New York City-based Poten & Partners, an advisory and brokerage service to the energy and ocean transportation industries, since 2007, the volume of ethanol blended into US gasoline production has jumped by 121 percent, to a year-to-date average 826 thousand barrels per day (kbpd). However, domestic ethanol output stalled during 2012, as the drought in America’s heartland drove corn prices sharply higher, slashing the margins from ethanol production. This drop in supply has reversed the country’s net export position in ethanol, prompting a rise in ethanol imports.
Corn Goes a Cropper
As late as June 2012, the U.S. Department of Agriculture (USDA) had reported that 66 percent of the US corn crop was rated good or excellent, but after a month of searing heat, this proportion had fallen to only 26 percent, with 2012-2013 crop year production estimates crashing from 13 billion bushels to only 10.7 bushels. Ethanol production had jumped as high as 959 kbpd in late-2011, in response to higher gasoline blender demand, ahead of expiring tax credits. Ethanol margins fell in early-2012 from the surge in supply, but competitive global pricing supported production during the first half of the year, until the drought arrived and punished margins. Since then, U.S. ethanol output has slid to 810 kbpd in October, a 10.2 percent decline from first half 2012 levels of 902 kbpd, according to Poten & Partners.
To date, roughly 40 percent of the annual U.S. corn crop has fed into ethanol production, with an estimated 4.9 billion bushels consumed in 2011. This past summer and autumn, faced with negative ethanol margins, producers began to shut down ethanol plants.
Industry Fights for RFS
The National Corn Growers Association (NCGA) has lobbied aggressively for continuation of the RFS2 mandate. According to association president Garry Niemeyer, “When it comes to the Renewable Fuel Standard for ethanol and other biofuels, now is not the time for changes. It’s working. The RFS is revitalizing rural America, reducing our dependence on foreign fuel and reducing the cost of gasoline. Making changes to the RFS now would only ensure that consumers suffer due to significantly higher fuel prices.”
In late September the NCGA joined the new Fuels America coalition, which spans the full spectrum of agriculture, national security, renewable energy and other stakeholders in support of ethanol and other biofuels. Niemeyer, himself a farmer from Auburn, Illinois, commented, “Corn farmers support ethanol and other biofuels, not only because they are essential to the continued growth of rural economies, but also because they play an essential role in ensuring the future of our nation. Domestically produced, renewable fuels create American jobs and increase national energy independence. Renewable fuels are a win-win solution to many of the energy problems facing o8ur nation and we believe that it is our duty to bring this truth to our representatives in Washington and to citizens across the country.”
EPA Finds No Evidence of Economic Harm
Now, there is good news for the biofuel industry on the horizon. On November 16, the US Environmental Protection Agency refused requests to waive the RFS2 mandate, arguing that it did not cause undue economic harm, despite steep competition for depleted U.S. grain supplies.
“We recognize that this year’s drought has created hardship in some sectors of the economy, particularly for livestock producers,” said Gina McCarthy, assistant administrator for EPA’s Office of Air and Radiation. “But our extensive analysis makes clear that Congressional requirements for a waiver have not been met and that waiving the RFS will have little, if any, impact.”
This is the second time that EPA has considered an RFS waiver request. In both cases, analysis concluded that that the mandate did not impose severe harm. In 2008, the state of Texas was denied a waiver
Poten & Partners project that ethanol production will stabilize during the fourth quarter of this year—and even tick slightly higher, as the second Renewable Fuel Standard (RFS2) enacted with EISA 2007 calls for a mandatory 13.2 billion gallons of ethanol production during 2012, or 861 kbpd.
Brooke Coleman, executive director, Advanced Ethanol Council, remarked, “The advanced ethanol industry commends U.S. EPA for denying the RFS waiver petition. Waiving the RFS would have done little if anything to reduce grain prices, but would have hurt consumers at the pump and undercut investment in advanced biofuels. Congress was right to protect the RFS from specious and politically-motivated waiver arguments, and to include in the program explicit flexibility provisions that allow the standard to adjust to changing market conditions. The RFS is well-designed and is the primary reason why the United States has emerged as the global leader in the development of advanced biofuels. There will be other stalking horses advanced by the oil industry to weaken the RFS, but it is a step in the right direction to put this one behind us.
Food for Thought
In a joint statement, the Environmental Working Group, Friends of the Earth and ActionAid USA responded, “We are disappointed with EPA’s decision to deny relief for those who need it most. High corn prices have put enormous pressure on livestock producers, dairy farmers and consumers, as well as the environment. While Americans struggle to stay afloat and put food on their tables, more than 40 percent of the nation’s corn crop is being used to make ethanol —a result of the requirements of the federal Renewable Fuel Standard.
“This decision should serve as a wake-up call to Congress and the White House that the Renewable Fuel Standard does not protect producers and consumers in times of hardship and must be reformed. Its reliance on mandates for food-based fuel – namely corn ethanol – exposes us to spiking prices whenever yields drop because of drought or other severe weather.
“The skyrocketing cost of animal feed will force 100 of California’s dairies out of business by year’s end. Overall, food prices are expected to rise by as much as 4 percent in the coming months, with even greater increases for meat, poultry, milk and eggs. These mandates have also spurred the conversion of 23 million acres of environmentally sensitive wetlands and grasslands – an area the size of Indiana – to row crops, mostly corn.
“In order to stem further damage, we urge that lawmakers in Congress consider a responsible phase-out of the corn ethanol mandate. No amount of tinkering can substitute for the impact of real reform.”
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Edited by Brooke Neuman