Reducing America’s consumption of renewable fuels based upon arbitrary, pre-determined thresholds for corn demand and supply ratios is unnecessary and may lead to higher prices at the pump warned leading biofuel organizations – the American Coalition for Ethanol (ACE), the American Farm Bureau Federation (AFBF), Growth Energy, the National Corn Growers Association (NCGA), the National Farmers Union (NFU), the National Sorghum Producersand the Renewable Fuels Association (RFA).
The groups’ warning came in a letter (pdf) sent to Reps. Bob Goodlatte (R-VA) and Jim Costa (D-CA) following the introduction of their legislation to reduce or eliminate the volumes of renewable fuel use required by the Renewable Fuels Standard (RFS) based upon corn stocks-to-use ratios. The groups pointed out a number of flaws in the rationale for such legislation.
Speaking to concerns over high corn prices, the groups wrote, “Numerous studies have concluded that the RFS is a minor contributor to corn prices. The most recent study, a July 2011 analysis commissioned by the International Centre for Trade and Sustainable Development, found that corn prices would have been exactly the same in 2009-2010 if both the RFS and Volumetric Ethanol Excise Tax Credit (VEETC) had not existed."
The groups also highlighted the inherent risk associated with tethering public policy to frequently changing corn stocks-to-use data reported by the USDA. According to University of Illinois Economist Darrell Goode, stocks-to-use ratio should only be considered “a starting point (for estimating potential price impacts)” and as such, “…the relationship between stocks-to-use and price is not consistent over time.” Such an imperfect indicator of potential market conditions should not be used as the basis for policy, the groups stated.
Should efforts such as this bill succeed in reducing America’s consumption of ethanol and other renewable fuels, drivers would feel the ramifications at the pump. “A recent analysis by economists at the University of Wisconsin and Iowa State University found growth in ethanol production reduced gasoline prices by an average of 25¢/gal., or 16%, over the entire decade of 2000-2010. The effects of ethanol on gasoline prices are magnified as gasoline prices rise and ethanol output increases. In 2010, for example, the authors found that the use of ethanol reduced wholesale gasoline prices by an average of 89¢/gal.,” the letter stated. One author of the report, Professor Dermott Hayes of Iowa State University warned that the result of an immediate reduction in ethanol output “would be a dramatic increase in U.S. gasoline prices and the resulting increase in U.S. gasoline imports would also cause world gasoline prices to increase in the short run.”
Importantly, the groups pointed out that flexibility already exists with the RFS regulations. Obligated parties under the RFS, typically oil refiners, may use excess Renewable Identification Numbers (RIN) credits rather than physical gallons to comply with their RFS obligations in the event high corn prices reduce ethanol production. As much as 20% of the 2012 RFS (equivalent to 2.64 billion gallons, or 950 million bushels of corn) can be met with excess RIN credits.
“A careful look at the facts reveals that American farmers have met, can and will continue to meet our domestic and international commitments for food and feed while still making a significant and growing contribution to lessening our dependence on imported oil with homegrown, American-made renewable fuels. We would welcome an opportunity to discuss the facts with you at your earliest convenience. We look forward to hearing from you to start this important dialogue,” the groups concluded.