Analysis: Long-term renewable fuel waiver needed to bring down corn prices

Five state governors have asked federal regulators to relax the renewable fuel standards, but according to a new analysis, the short-term relief they are seeking won’t sufficiently lower corn demand and prices amid a drought that has devastated crops in the Midwest.

According to the group, ethanol producers currently are the largest purchases of U.S. corn, snapping up 40 percent of the annual corn crop in 2011-2012 to help meet a mandate that requires refiners to blend a steadily increasing amount of corn-based ethanol and other biofuels into the nation’s transportation fuel.

“It is clear that ethanol is a major driving force in setting corn prices, and more importantly, its mandated use means its use remains relatively inelastic,” the group said. “Despite the droughts and record prices for corn and other crops, the (renewable fuel standard) has ensured that billions of bushels of corn and soy are set to be converted to fuels which offset less than 5 percent of the nation’s petroleum fuel supply.”

Texas Gov. Rick Perry has joined his counterparts leading Arkansas, Delaware, Maryland and North Carolina in seeking at least a one-year waiver of the renewable fuel standard. Perry said a timeout is needed because otherwise, the cost of groceries and feedstock will be pushed higher as refiners keep buying corn-based ethanol to satisfy the mandate, even though corn yields are down.

The Environmental Protection Agency is accepting public comments on the governors’ requests and is expected to make a decision by Nov. 13.

Renewable fuel supporters say the governors are trying to capitalize on concerns about the drought to get a break from the mandate before it starts squeezing refiners. They say the requests are made “under the guise of corn and food price concerns,” but really are aimed at dismantling the renewable fuel standard before it starts getting tough to meet without refining sector changes.

A major challenge is the so-called “blend wall,” established by the 10 percent limit to blending ethanol in most gasoline. The EPA has approved a higher 15 percent blend for some recent vehicles, but it is not readily available, and high ethanol fuels, such as E85, power a limited marketplace of autos.

The Energy Policy Research Foundation argues that a two- or three-year waiver below the blend wall would give refiners time to adjust their gasoline yields in response to lower ethanol production.

“Such a waiver would likely reduce corn prices, providing economic benefits in the form of feed and food prices, and would reduce the risk of a price spike in gasoline as obligated parties begin blending ethanol at levels above 10 percent of the gasoline pool,” the foundation said in its report. “A multi-year waiver could free over 18 million acres of existing farm land for the production of crops to meet market needs for food, livestock feed, exports or fuel.”

The Renewable Fuels Association has said a waiver would not dent corn prices to the low, “undervalued” levels prized by food processors and meat groups. According to the group:

“The fact is that waiving any portion of the RFS would likely lead to higher prices at the pump, a greater dependence on imported oil and a chilling slowdown in new biofuel technology investment and development.”