ISU (Babcock): Biofuel RFS Changes and RINs Impacts on U.S. Corn Prices

An analysis put out by Bruce A. Babcock of the Iowa State University Center for Agriculture and Rural Development (CARD) provides a Preliminary Assessment of the Drought’s Impacts on Crop Prices and Biofuel Production (see the full report here).  Following are some of the key findings of the report in regards to U.S. corn.  Soybean price impacts were also included in the analysis:

Three RFS mandate scenarios were examined through a stochastic simulation model.

A. Scenario #1: No flexibility in the RFS corn ethanol mandates – i.e., RFS met in full.

B. Scenario #2: The effective conventional biofuels mandate met by corn ethanol is reduced by 2.4 billion carryover RINs.

C. Scenario #3: All mandates are done away with.

Key results for each scenario are as follows:

A1. Results of Scenario #1 (No flexibility in RFS mandates):

  • U.S. average corn price         =$6.97 / bushel (vs $5.40-$6.40 for MY 2012/13)
  • U.S. ethanol production        = 14.3 billion gallons (using 5.2 billion bu of corn)
  • U.S. ethanol plant price         = $2.62 / gallon
  • U.S. ethanol demand price   = $1.61 / gallon
  • U.S. ethanol RIN price           = $1.01 / gallon
  • U.S. ethanol exports               = 670 million gallons (to Brazil exclusively)
  • U.S. ethanol imports               = 483 million gallons (from Brazil exclusively)

B1. Results of Scenario #2 (RFS mandate met by 2.4 billion gallons of carryover RINs):

  • U.S. average corn price         =$6.06 / bushel (vs $5.40-$6.40 for MY 2012/13)
  • U.S. ethanol production        = 12.9 billion gallons (using 4.691 billion bu of corn)
  • U.S. ethanol plant price         = $2.37 / gallon
  • U.S. ethanol demand price   = $2.22 / gallon
  • U.S. ethanol RIN price           = $0.16 / gallon
  • U.S. ethanol exports               = 1,160 million gallons (to Brazil exclusively)
  • U.S. ethanol imports               = 483 million gallons (from Brazil exclusively)

C1. Results of Scenario #3 (All RFS mandates eliminated):

  • U.S. average corn price         =$5.78 / bushel (vs $5.40-$6.40 for MY 2012/13)
  • U.S. ethanol production        = 12.3 billion gallons (using 4.473 billion bu of corn)
  • U.S. ethanol plant price         = $2.30 / gallon
  • U.S. ethanol demand price   = $2.30 / gallon
  • U.S. ethanol RIN price           = $0.00 / gallon
  • U.S. ethanol exports               = 950 million gallons (to Brazil exclusively)
  • U.S. ethanol imports               = 0 gallons

Of these scenarios, arguably B (with the RFS mandate being met by 2.4 million gallons of RINs) is already in motion – and the most likely to actually occur.  Other analysts have indicated 2.5 or 2.6 million gallons of RINs may actually be available.

The most striking result of this analysis is only the marginal reduction in U.S. corn prices that occurs from eliminating the RFS (scenario #3) compared to using up existing RINs (scenario #2).  U.S. corn prices only drop from $6.06 to $5.78 per bushel as a result of this change.  Babcock goes on to state the following:

“…if the current price of ethanol relative to gasoline accurately reflects the value of ethanol to blenders, then the price of ethanol will be supported at quite an attractive level as long as ethanol quantities are not pushing up against the blend wall. This implies that ethanol plants will be a strong competitor for corn even without a mandate. In the no mandate scenario simulated here, ethanol production drops by only 600 million gallons when the mandate is waived. This 600 million gallon drop in supply is enough to raise the value of ethanol in the marketplace to support 12.3 billion gallons of production and continue high corn prices. The desire by livestock groups to see additional flexibility in ethanol mandates may not result in as large a drop in feed costs as hoped.”

A key assumption was made in this analysis regarding the use of RINs that bears scrutiny.  Babcock states in this paper that:

” We do not account for the additional flexibility that allows borrowing from next year’s obligations to meet this year’s mandate, because this would push obligations in 2014 well beyond the ability of the US vehicle fleet to use the ethanol.” 

Although this is a prudent and cautious approach, it is worth considering what would happen in the ethanol use industry if 2012 U.S. corn production falls significantly below 11.5-12.o billion bushels to levels what the cant be dealt with by using up 2.4-2.6 billion gallons of ethanol RINs (equivalent to 873-945 million bushels of U.S. corn).  Even though in an asymmetric risk manner the uncertainties of using future RINs are much greater than using the 2.4-2.6 billion gallons of existing RINs, still in the worst case “lower tail” of U.S. corn production outcomes (i.e., such as 10.5-11.5 billion bushel 2012 U.S. corn production), this option may need to be seriously considered.

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