As livestock farmers call on the EPA to waive its requirement for corn ethanol production in response to this year’s U.S. drought, a leading renewable fuels producer is urging the government to resist the pressure, saying a waiver of the corn mandate could undermine confidence in other biofuels, and even result in higher food prices.
Renewable Energy Group, the largest U.S. producer of biodiesel, argues that any easing of the corn-ethanol requirement would create uncertainty for all biofuels, raising concerns in the industry about the sustainability of market demand.
Although REG does not produce ethanol, it fears that a waiver of even part of the Renewable Fuel Standard could have effects that go beyond the demand for corn at a time when drought has sharply reduced production.
REG argues that a waiver on ethanol could open up RFS2, the revised five-year-old standard that sets minimum levels for the use of renewable fuels as a partial substitute for gasoline or diesel, for suspension or waivers on those sections of the federal mandate that cover biodiesel or other renewable fuels.
In an interview with Breaking Energy, REG chief executive Dan Oh argued that reducing the requirement for ethanol production could undermine confidence among producers of other biofuels that the government will underpin demand for their products which are linked to food output.
“Food is more available because biofuels have increased overall agricultural production,” Oh said.
Farmers who produce beef, poultry, eggs, dairy and other products that depend on corn for livestock feed are calling for a cut in the ethanol mandate that takes up some 40 percent of the U.S. corn crop. They argue that such a cut would help offset the sharply higher corn prices that have resulted from crop yields at their lowest since 1995 and production that has dropped to its lowest for six years in response to sustained high temperatures and low rainfall in many grain-producing states.
The U.S. Department of Agriculture forecast in August that the average corn price in the current crop year would surge to $7.50-$8.90 a bushel from $5.40-$6.40 predicted only a month earlier.
We’re paying a high price for something that historically didn’t have a great purpose,” – Oh, REG
With the biodiesel industry paying more for the greases, oils and fats that come from crops and livestock, farmers will be more likely to raise those animals or crops because of the extra income they generate, Oh argues.
The sustained agricultural output boosts supply and helps to keep down food prices for consumers, he said. But a cut in the government-led demand for corn – and by extension other biofuels – could lead to a simultaneous cut in the farm products associated with them, he added.
A recent study by economists at Purdue University found that corn prices would fall the more the EPA reduced its requirement for ethanol production but would remain above those expected before the drought even under the biggest projected cut in the ethanol mandate.
If EPA cut the mandate to 7.75 billion gallons from the 13.8 billion gallons it currently requires for next year, the price of corn would fall to $5.80 a bushel, compared with the $7.81 that Purdue expects with an unchanged mandate. The price projections vary with stronger and less-severe drought assumptions, and are part of a scenario that is “highly uncertain,” the paper said.
“In making its waiver decision, EPA will have to weigh the economic harm of higher corn prices to livestock producers and to food and fuel consumers, against the interests of crop producers and ethanol producers,” the study said.
In 2011, about 80 percent of REG’s biodiesel was sourced from animal fats, as well as used cooking oil and inedible corn oil. Among its feedstock is white grease, whose price has doubled to about 45 cents a pound in recent years because of rising demand from biodiesel producers like REG, Oh said.
“We’re paying a high price for something that historically didn’t have a great purpose,” he said.
Oh argued that a cut in the corn-ethanol mandate would also set back progress towards national goals for biofuels production, which are already behind official targets. The RFS2 standard calls for the production of 36 billion gallons of renewable fuel a year by 2022, or around three times current output.
“We are lagging, and this cut in the waiver would not be helpful,” he said.