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 Jul. 10, 2012 Source: Renewable Fuels Association news release Late last week, a rumor caught fire on the trading floor in Chicago that EPA was going to waive down the Renewable Fuel Standard (RFS) by 20%, presumably based on concerns about the U.S. corn crop. As we all know now, that was just a rumor. However, it does underscore how misinformation spread deliberately or unintentionally can move markets and create mass confusion. In order to set the record straight, we wanted to provide some facts and insight on the statutory process relating to RFS waiver provisions. In order for EPA to waive RFS requirements, the agency must find that the program is causing economic "harm." The agency can reach such a finding on its own, or it can be asked to examine the question of "harm" via petition from the public. EPA must provide a public comment period and consult with other relevant agencies before making any final decisions regarding a waiver request. In short, EPA cannot waive the overall RFS targets on a whim - there is a well-defined process for waivers. You may recall, Texas Gov. Rick Perry filed a petition alleging "harm" from the RFS in 2008. After a thorough investigation, EPA roundly rejected Gov. Perry's petition. Here's some context about today's ethanol market: • Today, there are stocks of approximately one billion gallons of ethanol in the market - by historic measures, stocks are heavy and enough ethanol is in storage to provide sufficient supply support for the rest of the summer. • Ethanol producers have tightened their belts in recent weeks and reduced production. Last week's production was the lowest of the year and roughly 10% below levels from January. • Still, the industry remains on pace to easily satisfy this year's RFS target of 13.2 billion gallons. Year-to-date monthly EIA production data shows annualized ethanol production of 13.9 billion gallons. • Additionally, the US continues to export ethanol due to domestic market constraints. We're on pace to export 900 million gallons this year. • Finally, there are currently some 2.5 billion surplus Renewable Identification Numbers (RINs, or "credits") available to help obligated parties meet their RFS requirements. This rolling excess of credits has been accumulated over the last several years as oil companies have over-complied with their RFS obligations due to ethanol's attractive blending economics. Remember, the RFS is fundamentally a requirement to turn in a pre-determined number of credits to EPA to demonstrate compliance annually. This overhang of RINs provides sufficient cover for obligated parties to fulfill RFS volumes and time for both ethanol and grain markets to adjust. The bottom line is the EPA has no justification for altering the overall RFS in any way, nor does it have the authority to impulsively reduce the program's targets. Ultimately, the market will sort out any imbalances in supply and demand. Much like the petroleum industry, ethanol producers will read market signals and make decisions accordingly. Tweet |
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