Pressure to waive or change ethanol mandate grows due to drought, high corn prices

Stateline Midwest ~ September 2012

The long-simmering fuel vs. food debate has reached a boiling point, as the result of drought conditions that have raised corn prices and precipitated requests for the EPA to adjust the federal Renewable Fuels Standard.

On Aug. 20, the U.S. Environmental Protection Agency opened a 30-day public comment period on requests to provide temporary relief from the RFS mandate. The agency has until mid-November to decide whether to grant the waiver.

Under the federal RFS, signed into law in 2007, refiners, blenders and importers must use 13.2 billion gallons of ethanol in 2012. That same law allows governors to formally petition the EPA for mandate relief, and the governors of Arkansas and North Carolina did so in August. 

In his letter, Arkansas Gov. Mike Beebe says the drought has exacerbated the problem of high corn prices and a shortage of grain supplies, but he points to the RFS as being an underlying cause as well.

“Ethanol production now consumes approximately 40 percent of the U.S. corn crop,” he wrote, “and the cost of corn for use in food production has increased by 193 percent since 2005.”

In addition to the governors’ request, the EPA received two congressional letters (one from 156 members of the House, another from 23 members of the Senate) calling for relief from the mandate.

“Food producers have been saying for years that this was going to happen; well, it’s happened,” says

Thomas Elam, an agricultural consultant at Indiana-based FarmEcon LLC who supports eliminating the ethanol mandate or, at least, modifying the RFS.

But how much relief would be provided by lightening the mandate? Agricultural economists at Purdue University and Iowa State University tried to answer that question in separate studies released in August.

Depending on the severity of the drought, market conditions and the extent of the waiver, Purdue researchers concluded that the impact could be anywhere from “zero to $1.30 per bushel for corn.”

Iowa State’s Bruce Babcock estimates a 7.8 percent drop in the price of corn — an indication that providing “additional flexibility on ethanol mandates may not result in as large a drop in feed costs as they [livestock producers] hope,” he concluded.

Ethanol advocates also point to the work of another Iowa State professor, Dermot Hayes. In a study released this year, Hayes concluded that ethanol has significantly increased the nation’s fuel supply and reduced wholesale gasoline prices, by an average of $1.09 per gallon in 2011. The reduction, Hayes says, was even more pronounced in the Midwest.

Four years ago, the EPA denied a request by the governor of Texas to reduce the ethanol mandate by 50 percent. Federal officials concluded then that the mandate was not doing “severe harm” to the economy — the criterion that the EPA must use in deciding whether to grant a waiver.

This time around, Elam says, the agency will only grant a waiver if more political pressure is applied by consumers (who could feel the impact in the form of higher food prices) and livestock groups. Another factor, Elam adds, will be the exact severity of the drought and its impact on corn supplies.

Congress could also move to change the RFS. Proposals have already been introduced to eliminate the ethanol mandate altogether or to link the blending requirement to the amount of U.S. corn supplies.

Under existing law, the ethanol mandate will rise to a maximum of 15 billion gallons in 2015.

The total RFS increases to 36 billion gallons by 2022; as written, the law envisions a greater use of renewable fuels that do not use corn, such as cellulosic ethanol.

Elam believes the higher RFS “will become substantially more unworkable” due to factors such as a lack of commercially viable cellulosic ethanol and the failure of E85 to make a dent in the gasoline market.

No region has more of a stake in the outcome of this food vs. fuels debate than the 11-state Midwest, home to 87 percent of U.S. ethanol production. According to an economic analysis done for the Renewable Fuels Association, the ethanol industry in 2011 was directly responsible for 90,200 jobs and contributed $42.4 billion (both direct and indirect) to the nation’s gross domestic product.

These economic impacts are concentrated in the Midwest, but the region also has a large livestock industry: It is home to five of the nation’s 10 highest-producing livestock states (see table).