Shrinking corn yields puts ethanol in the hot seat again

Aug 24, 2012

As crop yields continue to decline and feed prices skyrocket, the long-standing battle for corn continues to grow.

While the ethanol debate rages on, producers were given some hope last week when the Environmental Protection Agency (EPA) opened a 30-day public comment period on a waiver request from two governors that voiced concern over the worst drought in 50 years and the continuing climb of the price of corn.

The EPA issued its request for comments August 20, following the requests from Arkansas and North Carolina for the EPA to waive a portion of the Renewable Fuel Standard (RFS) under section 211(o)(7) of the Clean Air Act.

Under this statute, EPA shall decide on a waiver request within 90 days of receiving it, in consultation with the Departments of Agriculture and Energy.

“This notice is in keeping with EPA’s commitment to an open and transparent process to evaluate requests the agency receives under the Clean Air Act, and does not indicate any predisposition to a specific decision,” agency spokeswoman Alisha Johnson said in a statement.

The 90 day period for a response does, however, put the final decision past the November 6th elections, adding another piece to an already politically charged year.

While the agency is responding to the governors of Arkansas and North Carolina it has also noted, “Other organizations and individuals––including among others the governors of the states of Delaware and Maryland, the National Pork Producers Council, the Dairy Farmers of America, and various members of Congress–– have also submitted requests or expressing support for the granting of a volume waiver,” and that it would consider additional requests if they are made.

“It is abundantly clear that substantial evidence exists now within the existing reports of USDA regarding expected crop yields and within private sector forecasts of crop yields that current and futures pricing of corn will result in severe economic harm in the poultry and livestock sectors,” wrote Georgia Gov. Nathan Deal (R) in his petition.

“Georgia is experiencing severe economic harm during this crisis, and important economic sectors in the state are in serious economic jeopardy. This harm is precisely of the type, character and extent that Congress envisioned when it granted EPA authority to waive Renewable Fuel Standard (RFS) applicable volumes,” Deal continued.

With the intent of reducing U.S. reliance on foreign oil, the current RFS would require 13.2 billion gallons of ethanol to be made from corn this year.

EPA’s request for comments includes input on whether the RFS would severely hurt the economy and what effect a waiver would have on ethanol demand and corn prices.

According to DTN’s Washington Insider, the difficulty the agency faces is reflected in the vast amount of information requested during the comment period.

The request asks whether a waiver would change demand for ethanol and affect prices of corn, other feedstocks, feed and food, in addition to request for estimates of the amount of ethanol that is likely to be consumed in the U.S. during the relevant time period, based on its value to refiners for octane and other characteristics and other market conditions in the absence of the RFS volume requirements.

EPA also wants suggestions about the amount of the requirements that would be appropriate to waive, if a waiver was granted and the date on which any waiver should commence and end.

In 2008, Texas Gov. Rick Perry sent a similar waiver request that was rejected. The EPA said his request failed to show the mandate itself was severely harming a region’s economy and not just contributing to economic damage. And while the current waiver request expresses urgency, it maybe be important to note that the 2008 waiver request from Gov. Perry took 104 days total, 73 business days.

According to the Renewable Fuels Association (RFA), the circumstances outlined in the governors’ requests rise to the level of severe economic harm laid out in the EPA rejection of the 2008 Perry waiver request. Specifically, EPA set forth these criteria: • EPA would have to determine that the implementation of the mandate itself would severely harm the economy; it is not enough to determine that implementation of RFS would contribute to such harm; • EPA would also have to find that there is a generally high degree of confidence that the RFS is severely harming the economy; and • This requirement calls for a high threshold for the nature and degree of harm that would support the issuance of a waiver based on “severe harm” to the economy of a State, region, or the United States.

According to RFA, a great deal of flexibility is built into the RFS, including more than 2.5 billion RFS credits that can be used instead of physical gallons of ethanol by oil refiners to meet their RFS obligations. RFA also says there is about 800 million gallons of ethanol in storage that could be used.

“Given that domestic ethanol production and use is helping lower gasoline prices by $0.29 over the last decade and $1.09 last year alone, it is clear that waiving the RFS would result in more harm than is being alleged by these governors,” RFA said in a release.

National Cattlemen’s Beef Association (NCBA) and other livestock groups have been pushing for the waiver for several months.

According to NCBA, under the RFS requirements, 13.2 billion gallons of cornbased ethanol must be produced in 2012 and 13.8 billion gallons in 2013, amounts that will use about 40 percent of the nation’s corn crop.

Due to this year’s crippling drought, some agricultural forecasters now are estimating that just 11.8 billion bushels of corn will be harvested this year, meaning corn-ethanol production will use about four of every 10 bushels.

In a recent report titled “Potential Impacts of a Waiver of Ethanol Blending Rules,” Professor Wallace Tyner, agricultural economist at Purdue University and his colleagues calculated that under extreme drought conditions with no reduction in the 13.8 billion gallon RFS in 2013, corn prices could rise to roughly $8.57 a bushel.

In early August, more than 150 representatives and 30 senators sent two signed letters to EPA Administrator Lisa Jackson.

“The RFS mandate has created a domino effect. Tightening supplies have already driven up the price of corn, and the extreme weather being experienced by much of the nation will only further increase prices. I am pleased that my colleagues in the Senate have joined me and 155 other Members of the House of Representatives in urging EPA Administrator Jackson to act now to make a critical reduction in the RFS for 2012,” said Congressmen Bob Goodlatte (R-VA). “We should not be in a position where we are choosing between fuel and feed for our livestock.”

NCBA President J.D. Alexander said his organization supports American ethanol. Alexander, who is a cattleman from Nebraska, said corn-based ethanol has done a lot to stabilize many rural communities in his state and yields a co-product, dried distillers’ grains, which many cattlemen use as a feed ingredient. Alexander, like many of the members of Congress urging EPA to issue the waiver, is seeking a level playing field for cattlemen to compete “head-tohead” for a bushel of corn in one of the worst droughts in the nation’s history.

“We find it concerning that these mandates are allowed to continue today in the worst drought I have seen in my lifetime. Seventy percent of cattle country is under drought conditions—this is not isolated to a certain part of the country. One has to wonder how bad the drought has to get before EPA uses its authority to grant a RFS waiver,” said Alexander. “This isn’t rocket science. Let the market work.”

According to the Aug. 16 U.S. Drought Monitor report, 87 percent of the corngrowing areas are experiencing some degree of drought, with more than half of those areas experiencing extreme to exceptional drought.

While the National Corn Growers Association (NC- GA) has long been an ethanol promoter, the drought has the organization taking a careful look at both sides.

“We have great concern and empathy for not only our members who are suffering, but all who we supply. This includes the domestic livestock sector, our export customers, the domestic food industry and the ethanol industry. All are suffering because of the drought,” NCGA President Garry Niemeyer shared in a statement.

Niemeyer went on to point out that if the analysis showed the RFS was not causing severe economic harm, NCGA stood firm on the importance of rejecting the waiver. “If however, the analysis clearly shows that the RFS is causing severe economic harm in light of the drought, then a temporary, partial waiver should be granted,” Neimeyer added. — Traci Eatherton, WLJ Editor