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Call to waive Renewable Fuels Standard as US drought crisis hits ethanol and livestock producers hard

As the IEA today confirmed that US ethanol production has plunged to a two-year low, pressure is being placed on the US Environmental Protection Agency (EPA) to waive the Renewable Fuels Standard (RFS), which mandates that 13.2 billion gallons of ethanol be produced this year.

Calls to waive the RFS come in the wake of the worst drought the US has experienced in 55 years, which is severely affecting its key corn growing regions. The drought, in combination with current low level of US corn stocks, has raised prices of fodder for livestock, putting increasing economic pressure on meat and poultry producers - around 40% of the US corn harvest is processed in ethanol distilleries, and one third of this is returned to the fodder market as high protein feed.

At the same time, US ethanol producers are also struggling. Production of fuel ethanol – produced from fermenting sugar or starch bearing crops such as corn – has dropped to around 800 thousand barrels per day (kb/d) in the US, the lowest level in two years, according to the latest monthly Oil Market Report (OMR) from the International Energy Agency (IEA), published today.

The continued absence of rain in combination with very low US corn stocks have driven up corn prices to record highs during the last weeks, says the IEA. These high corn prices, in combination with falling ethanol prices (reflecting in part a combination of a weak economy and automobile efficiency improvements), have slashed ethanol producers profit margins. This has led to a number of ethanol plants reducing or temporarily halting production, which has in turn prompted the two-year low in ethanol output. “Given the current situation, we see US ethanol production at an average around 850 kb/d in 2012, 60 kb/d lower than in 2011”, noted the OMR.

Livestock producers want the RFS waiver in the hope it would reduce the amount of corn diverted towards ethanol production, and in turn lower the price of corn (due to falling demand). “For the RFS to be waived, however, it needs to be proved that it is inducing economic harm on livestock producers who can not afford to pay for corn at the heightened price levels,” says the IEA.

More than 150 members of congress are reportedly supporting the RSF waiver call, but there is currently no indication from EPA that it will waive the RFS mandate. The OMR points out that US ethanol stocks are fairly high at 800mn gallons, providing the possibility to satisfy at least part of the 13.2bn gallons mandated for 2012.

In addition, according to the Renewable Fuels Association, around 2.5bn ethanol credits, so-called Renewable Identification Numbers (RINS), have been banked in recent years as refiners blended more ethanol than was required by the RFS. “These RINS provide some flexibility for blenders to meet the 2012 RFS requirements despite the projected lower ethanol output, and could help reduce some of the pressure on corn prices,” the OMR concluded.

“Recent analysis also suggests that a RFS waiver might not have as strong an effect on corn prices as some might hope,” added the IEA. “Most refiners have adjusted to replace around 10% of their gasoline production with ethanol and in addition have adopted ethanol as an octane enhancement for regular gasoline, both of which could mean domestic demand might remain strong even without the mandatory ethanol quota in place.” 

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