Analysis: Why the U.S. ethanol mandate is drought-resistant
WASHINGTON (Reuters) - At first glance, it would seem like a golden moment for critics of the U.S. law that requires more and more corn to be made into ethanol every year.
The worst U.S. drought in half a century has fueled a 50 percent surge in corn prices to a record of more than $8 a bushel, heightening fears of a food crisis. Even as the crop wilts, the farm economy has rarely looked healthier thanks to high property prices, widespread accessibility to insurance and a four-year commodity boom.
And a renaissance in domestic oil output in North Dakota and Texas is eating into dependence on foreign crude. Supporters of motor fuel made from U.S. grain have long used the foreign oil addiction as an argument for the Bush-era mandate, known as the Renewable Fuels Standard, or RFS.
Poultry, beef and pork producers complain the RFS, which requires petroleum blenders to use 13.2 billion gallons of corn ethanol this year or face fines, is also behind the rise in corn prices.
The higher corn goes, the more it boosts prices for one of their top expenses: animal feed. So the industries are pushing the Environmental Protection Agency to waive the mandate fully or partially this year.
But even with growing numbers of Midwestern counties declared disaster areas by the government, no ethanol opponent can yet make the case the EPA has said is necessary to grant a waiver: that implementing the mandate itself is causing "severe harm" to the economy of a state, region, or the country.
"Severe economic damage is a very high bar," said Mark McMinimy, a senior policy analyst at Guggenheim Washington Research Group, part of a financial services company.
Texas Governor Rick Perry discovered that for himself in 2008 when drought boosted grain prices and the meat industries pushed him to petition the EPA to waive the mandate. The agency turned him down, emphasizing that future petitions would have to demonstrate implementation of the mandate itself was causing the economic harm, not just contributing to it.
"I really don't see at this point what basis the administration would use to issue a waiver," McMinimy said.
U.S. Agriculture Secretary Tom Vilsack told a press conference at the White House on Wednesday the drought will spike crop prices. He also said beef and pork prices might rise late this year after rising in the short-term as ranchers and poultry farmers shrink herds and cull flocks.
But he also reiterated his agency's prediction last week that the corn crop could still be the third largest on record due to wider than normal plantings across the country this year.
EASIER TO PLAY IT SAFE AND DO NOTHING
In 2007 George W. Bush signed the RFS into law. It required 9 billion gallons of ethanol from corn in 2008, when Perry asked for the waiver. In 2015, the mandate peaks at 15 billion gallons requiring that level through 2022.
The mandate -- run by the EPA under the Clean Air Act -- was also embraced by President Barack Obama even before he hit the campaign trail for re-election and pushed an "all of the above" strategy on energy. Obama's blueprint lays out a future for oil, natural gas and wind and solar, but also for biofuels including ethanol made from corn.
Three of the swing states in the election, Ohio, Michigan, and Iowa, are top corn growing states, where voters might be dismayed by a move to take an important market for the grain off the table.
"The political cost that you would take on if you did abandon these programs is quite high still," said Divya Reddy, an energy policy analyst at the Eurasia Group, a risk analysis company. "It's easier to play it safe and not grant a waiver, unless food prices literally go through the roof."
The EPA could issue a waiver on its own if it found the RFS to be severely harming the economy or the environment. But a spokeswoman for the agency said it was not considering such a measure, and had not received any requests.
Meat industry groups said they are looking for a governor to petition the agency and could find one soon, but they declined to mention names. Perry, whose state has plentiful ranchers and oil refiners who complain the RFS has added to costs, said he is not considering asking the EPA to waive the mandate.
BILLS LANGUISH IN CONGRESS
Seeking to reform the law, lobbyists for poultry, beef and pork producers are fanning out across Capitol Hill, pleading their case to lawmakers the mandate destroys profits and reduces the number of animals they can raise.
They funded a study by Thomas Elam, an agricultural economist, released Thursday that said the RFS is raising food prices and has done nothing to cut gasoline prices.
More than 140 turkey industry executives went to Congress last week trying to drum up support for bills introduced last October by Representative Bob Goodlatte, a Virginia Republican.
One Goodlatte bill would kill the mandate outright. The other would set a formula to reduce the RFS when corn prices spike. The bills though, are stalled in the House Energy and Commerce Committee, with limited backing. The measure to kill the mandate has 14 co-sponsors out of the 435 representatives and the bill to make it more flexible has 30 backers.
In the Senate, anti-corn ethanol efforts are even less developed. The staffs of Republican James Inhofe of Oklahoma and Democrat Chris Coons this week scaled back plans to study the mandate after reports surfaced the lawmakers had hoped to study ways it could be reformed in coming years. A Senate aide who did not wish to be identified said the group now only plans to meet once, down from plans for six times, after lawmakers balked that the group was studying the law without their participation.
It is unclear that the push to reform the mandate would fare any better if Mitt Romney won the presidency. Linda Stuntz, a lawyer who represented the Romney campaign in an energy debate last week, said she did not know whether he would push to reform the mandate due to the drought.
Beyond the politics, there are practical reasons to believe a waiver may not offer as much relief as some believe.
For their part, the ethanol industry says there is no need to reform the law because it already offers ethanol blenders a degree of flexibility in meeting their quota, allowing them to apply about a fifth of one year's surplus production against the following year's mandate.
Because output ran far above last year's mandate, oil companies can use more than 2.5 billion of 2011's renewable fuel credits known as Renewable Identification Numbers, or RINS, to meet this or next year's quota in lieu of buying ethanol.
"I do not look for a change in the RFS. In my opinion, they will let the market work it out," says Rich Nelson, Director of Research at Allendale Inc, an agricultural advisory firm.
For another, the EPA's fuel specification requires blending gasoline with some form of oxygenate, with ethanol being the cheapest and most abundant. Some experts say that even without the RFS oil companies would still be buying almost as much ethanol in order to meet those standards.
And as corn prices hit record levels some ethanol plants have closed, which could dampen the impact of making the fuel on prices for the grain.
Last but not least, the EPA -- already under fierce Republican criticism for pushing forward initial rules on greenhouse gas emissions -- will be loathe to yield on a program embraced by the president.
"The drought and its full effects on the ethanol market are still not clear," said the Eurasia Group's Reddy. "Unless the situation really deteriorates significantly, I don't see the EPA taking on that political cost of granting any waivers.
"It would set a negative precedent for the administration's faith in the program, period."