EPA leak on RFS mandate pressures corn market

Oct 21, 2013

The Environmental Protection Agency (EPA) has likely had to “up” their phone coverage following a leaked memo, hinting that it was considering reducing the ethanol mandate for 2014.

If, in fact, this information is true, the corn market is looking at some big changes.

But the EPA is covering its tracks, saying that it has no final decisions on the mandate yet.

On Oct. 11, Reuters and other news outlets shared information on EPA documents that showed the agency proposing an unexpected drop in the amount of cornbased ethanol that would be required for blending next year, a historic retreat from the 2007 biofuel law and a major victory for the oil industry.

“At this point, EPA is only developing a draft proposal,” EPA Administrator Gina McCarthy said in a statement in the agency’s first public response to the reports.

She said the Obama administration remained “firmly committed” to developing biofuels as a part of the plan to reduce U.S. dependence on imported oil.

The statement made no specific mention of the draft EPA documents reported by Reuters and other news outlets that hinted at a cut of nearly 3 billion gallons next year.

“No decisions will be made on the final standards without a full opportunity for all stakeholders to comment on the EPA’s proposed 2014 renewable fuel standards and be heard on how to best foster a growing biofuels industry that takes into account infrastructureand market-related factors,” she said.

The leaked memo and news coverage wreaked havoc on the ethanol market.

The leaked documents’ authenticity has been questioned, considering its timing on the heels of a political battle between oil refiners and ethanol groups. Yet, the markets still reacted to the news. The Financial Times reported last Monday that the market for ethanol credits, purchased by petroleum companies to stay within legislatively mandated minimums for ethanol usage, fell a full 25 percent.

Growth Energy, a leading ethanol group, called for U.S. agencies to investigate the leak of what it called “unverified ‘draft’ documents” that were still under review, a process stalled by the government shutdown.

“The 2014 RVO [Renewable Volume Obligation] rulemaking process is not final, and we are not going to comment on an unverified ‘draft’ document. There are many steps in the rulemaking process before a rule becomes final. Unfortunately, as a result of the government shutdown, the process is on hold,” Tom Buis CEO of Growth Energy said prior to the restart of the government. Buis continued his comments saying a government restart would hopefully resume the rulemaking process, “instead of everyone reacting to premature reporting, of unverified leaks, allowing the EPA to follow proper procedures to propose a rule for everyone to comment on.”

“Obviously, someone was irresponsible in leaking such market sensitive information. Because of the dramatic economic impact on commodity markets, there should by an immediate investigation by the Justice Department, and the Commodity Futures Trading Commission to determine if this was an attempt to manipulate markets such as corn futures, ethanol futures and/or RINS [Renewal Identification Numbers] markets,” Buis added.

The ethanol group’s strong response illustrates the highly charged nature of the debate between two industries fighting over the future of the U.S. fuel supply, and the recent government shutdown left few answers to the multitude of questions the controversy has created.

DTN Grains Analyst Todd Hultman did the math on what EPA’s rumored proposal would do to corn demand for ethanol. Reportedly, total cuts would take biofuel use from 18.15 billion gallons (in 2014) to 15.21 billion gallons. Included in those figures is corn-based ethanol decreasing from 13.8 billion gallons to 13.0 billion gallons. All told, this would mean an approximate 260 million bushel decrease of corn demand for ethanol in 2014.

An EPA scaleback would support the oil industry’s argument that the U.S. fuel chain cannot absorb the current blend amount mandated.

Proponents argue that the blend wall is largely a fiction constructed by an oil industry that doesn’t want to cede any more share of a shrinking U.S. gasoline market.

Whether or not the leaked document is real, a court battle is likely to ensue in the near future.

“Let me be clear: any plan to roll back the targets ... under the guise of addressing the blend wall would be patently unlawful,” said Bob Dinneen, president of the Renewable Fuels Association.

On Oct. 10, U.S. oil industry groups sued the EPA over its 2013 biofuel targets.

The American Fuels & Petrochemical Manufacturers (AFPM) filed a lawsuit in the U.S. Court of Appeals for the District of Columbia that said the agency’s methodology for setting requirements for advanced cellulosic fuel was shrouded in secrecy.

“AFPM has taken issue with EPA’s reliance on data that was not available for public comment and its use of a methodology for setting cellulosic biofuel requirements that is shrouded in secrecy and continues to overestimate the amount of cellulosic fuel that will be produced and available for compliance. AFPM also is asking the court to force EPA to abide by the statutory deadlines and put an end to EPA’s retroactive application of the renewable fuel requirements, which confounds refiners’ ability to comply with the law,” AFPM said in a release.

AFPM also petitioned EPA to waive the cellulosic biofuel requirement based on EPA data and statements from cellulosic biofuel producers, demonstrating that there will be a dramatic shortfall in the amount of cellulosic biofuel produced in 2013. — Traci Eatherton, WLJ Editor