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EPA Denies RFS Waiver

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The EPA recently announced that it would be denying the request for a waiver of the Renewable Fuels Standard (RFS). The EPA indicated that the agency did not find the necessary evidence to support a finding of “severe economic harm” that would have warranted the RFS waiver to be granted. EPA used a series of economic analyses and modeling done in conjunction with USDA and the U.S. Department of Energy (DOE). EPA indicated a strong recognition of the severe drought in 2012, along with the economic hardship it has placed on livestock producers; however, based on the analysis conducted, EPA did not feel there was enough justification for a RFS waiver at this time.

Earlier this summer, governors of nine states, along with 26 U.S. Senators and 156 U.S. House members, officially petitioned EPA to grant the RFS waiver. In addition, the request for a RFS waiver was supported by a majority of livestock and poultry organizations across the U.S., as well as many other groups in the food industry. Most of the groups requesting the RFS waiver cited the impacts of the 2012 drought on future U.S. food prices, as well as the impact of profitability for livestock producers due the very high feed costs. Of course, the National Corn Growers Association (NCGA) and most ethanol organizations opposed the RFS waiver. EPA received over 29,000 comments on both sides of the issue during the official comment period on the RFS waiver request.

The 2012 drought has brought the Renewable Fuels Standard (RFS) into the forefront, with the drought significantly affecting over two-thirds of the major corn- and soybean-producing areas of the U.S. A large percentage of the primary crop growing areas in Illinois, Indiana, Iowa, Missouri, Nebraska and Kansas were in impacted by severe to extreme drought conditions in 2012, with major reductions in crop yields reported. The November USDA Crop Report estimated the 2012 total U.S. corn production to be 10.7 billion bushels, which is the smallest total production since 2006. This compares to a total corn production of 12.3 billion bushels in 2011, and 13.1 billion bushels in 2009.

The RFS requires U.S. ethanol production of 13.2 billion gallons in 2012, which will utilize approximately 4.7 billion bushels of corn. In 2013, the RFS mandates that ethanol production increase to 13.9 billion gallons, which will use an estimated 4.9 billion bushels of corn. The RFS program was originally created as part of the Energy Policy Act of 2005, and later revised under the Energy Independence and Security Act (EISA) of 2007. The EISA expanded RFS to include biodiesel and listed targets for ethanol production from sources other than corn, such as cellulosic-based ethanol. Currently ethanol makes up about 10% of the U.S. fuel supply, with just over 13 billion gallons of ethanol per year being produced in the U.S.

The EPA reviewed studies and economic analysis from several universities and private research firms regarding the impacts of a potential RFS waiver; however, it appears that EPA relied most heavily on a recent study conducted by Iowa State University (ISU). The ISU study indicated that a partial or full waiver of RFS regulations may not achieve the goal of more corn availability for feed and lower feed costs that some are hoping for. The study indicates that the economics for using ethanol as an oxygenate in gasoline is driven more by gasoline prices and worldwide oil prices, rather than by the RFS regulations. The study concludes that as long as ethanol production is profitable, production will continue close to current levels, with or without the RFS requirements.

The EPA final analyses of livestock feed costs for 2011 showed that total U.S. feed cost in 2011 for combined cattle, pork, poultry, and dairy production was $77.8 billion. EPA estimated that granting the RFS waiver would only lower corn prices by about 1%, or approximately 7¢/bu. The EPA analyses showed that a decrease of 7¢/bu. in the U.S. corn price would only reduce total U.S. feed costs by $452 million, or 0.6%. EPA estimated that a reduction of 58¢/bu. in the U.S. corn price would result in total U.S. feed prices being decreased by just under $4.0 billion, or nearly 5%. EPA also found that implementing the RFS waiver would likely have a fairly minimal effect on overall U.S. consumer food prices.

Predictably, many livestock groups have reacted negatively to the EPA decision on the RFS waiver, citing continued financial distress for livestock producers across the nation. Livestock producers in many areas of the U.S. are not only facing extremely high feed costs, but are also dealing with problems associated with feed availability. The National Beef Cattleman’s Association (NCBA) estimates that the 2012 drought, and the resulting low profitability, will lead to liquidation of 500,000 beef cows and 50,000 dairy cows in the U.S. by year’s end. The estimated cost of production for pork producers rose sharply in the third and fourth quarters of 2012. Based on hog prices during that period and hog futures prices in the coming months, many experts are now projecting a loss of about $20-$30 per hog marketed during the six-to-12-month period from July 1, 2012 to June 30, 2013.

Just as predictable, the NCGA and ethanol groups have lauded the EPA decision and analyses on the RFS waiver request, citing the rural economic development and the estimated 400,000 jobs created in the U.S. as a result of the ethanol industry. Some ethanol leaders point out that ethanol production has slowed in some areas in the past few months, due to the higher corn costs and tighter profit margins, so total corn usage for ethanol may dip below projected levels. Ethanol industry leaders also point out that ethanol production will generate approximately 1.7 billion bushels of dried distillers' grains (DDGs) in 2012, which is a high quality livestock feed source that is fed as an alternative to corn and soybean meal. Many ethanol experts feel that the feed value of DDGs is not being properly included in ethanol corn-use calculations. 

The EPA decision on the latest RFS waiver request will not likely end the debate over the role that federal regulations should play in mandating U.S. ethanol production in the future. This issue has divided farm organizations and members of Congress, and is pitting farmer against farmer. In some cases, it is pitting famers against themselves, if they are involved in both the livestock industry and the ethanol industry. For the good of the U.S. agriculture industry, it is imperative that leaders on both sides of the ethanol issue continue to look for future solutions that are acceptable all segments of the industry.

 

Editor’s note: Kent Thiesse is a former University of Minnesota Extension educator and now is Vice President of MinnStar Bank, Lake Crystal, MN. You can contact him at 507-726-2137 or via e-mail at kent.thiesse@minnstarbank.com.

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