Biofuels: Gasoline Prices- RINs, and Lawmakers Consider RFS
University of Illinois Agricultural Economists Scott Irwin and Darrel Good indicated yesterday at the farmdoc daily blog (“High Gasoline and Ethanol RINs Prices: Is There a Connection?”) that, “On March 8 we wrote about the sharp increase in the price of ethanol (D6) RINs since the first of the year. There, we indicated that the E10 blend wall would require RINs credits to be used to meet part of the RFS mandate in 2013 and beyond, increasing the value of those RINs credits. As indicated in Figure 1, the price of 2013 (current year) vintage D6 RINs remains high. The price was quoted at $0.685 per gallon on March 21, 2013, after peaking at nearly $0.90 two weeks ago.”
In part, the farmdoc update explained that, “The high price of D6 RINs has received a lot of attention within the petroleum industry, the biofuels industry, in the main line media, and in Congress. Conclusions about the potential impact of high RINs prices on the cost of complying with RFS2 and the price of gasoline in 2013 have ranged from no impact to a full pass through of the higher prices to retail gasoline prices. As a result the proposed responses to the high prices have ranged from calls to sharply amend the RFS2 requirements to demands that the petroleum industry implement E15 at a much more rapid pace.
“It is difficult to make a precise estimate of the impact of high RINs prices on gasoline prices in large part because of the diversity of obligated parties within the motor fuel supply chain. Obligated parties under the RFS2 include (1) refiners and importers of finished gasoline or unfinished gasoline that becomes finished gasoline when blended with an oxygenate (e.g., ethanol) downstream and (2) downstream parties who use non-renewable blendstocks to make finished gasoline, RBOB, or CBOB. In addition, there are non-obligated parties who blend ethanol and retain ownership of RINs. Some of the obligated parties are fully integrated through the motor fuel supply chain (refining/blending/retailing). At the other extreme some obligated parties participate only at one end of the supply chain. These would include firms who only import or refine and those who only blend. In addition, other firms may be partially integrated in the supply chain. The distribution of RFS2 obligations among firms with these different business models is not public information.”
After additional analysis, the economists pointed out that, “In sum, it is difficult to nail down precisely the impact of current high RINs prices on the cost of RFS2 compliance and retail gasoline prices.
“This situation does not mean we are left totally in the dark about the possible impact of rising RINs prices. It is still useful to examine recent prices of CBOB, ethanol (with RINs attached), and RINs and see if the trends provide clues about the impact.”
The farmdoc item added that, “We examine the CBOB price since CBOB constitutes about two-thirds of the blendstock used to make finished gasoline in the U.S. As shown in Figure 2, the wholesale price of CBOB gasoline at Chicago generally declined during the last quarter of 2012, but started moving higher in late December, prior to the start of the rally in D6 RINs prices. CBOB prices peaked in mid-February and by March 21 were below the level of early October. RINs prices started moving higher in January and peaked near $0.90 in early March and then declined modestly. The timing of the increase in CBOB gasoline prices predates the increase in RINs prices by several weeks, which casts doubt on RINs prices as a significant driver of gasoline blendstock prices. In addition, CBOB prices were lower in late March than in October, further suggesting that factors other than RINs prices dominated CBOB prices.
“Figure 2 also shows that ethanol prices (with RINS attached) and RINs prices moved in a more concurrent manner.”
Concluding, Drs. Irwin and Good stated that, “The impact of higher RINs prices on the cost of complying with RFS2 and the implications for retail gasoline prices is not easy to quantify. The interaction of obligated parties in the gasoline supply chain under the RFS2 is particularly complex. Nonetheless, the basic zero sum nature of relationships in the supply chain and recent price trends for CBOB blendstock and ethanol suggests that the impact, if any, has likely been small, at most a few cents.
“Importantly, the E10 blend wall and current high prices of D6 RINs may be revealing a significant flaw in the way EPA designates obligated parties for RFS2. In 2010, EPA considered, but rejected, the alternative of moving all RVOs downstream of refineries and importers to those who supply finished gasoline at the retail level. This change would have resulted in a more homogeneous group of obligated parties and better aligned an obligated party’s RVO with access to RINs. Such a re-alignment may have precluded some of the current diverse impacts of high RINs prices on obligated parties and minimized the cost of RFS2 compliance. Adjustment in this direction would seem to be a sensible policy response in light of the drastically changed market circumstances since the RFS was originally passed in 2005 and modified in 2007.
“The narrow focus on RINs prices also diverts attention from the broader issue of ethanol blending economics and how energy market participants, including consumers, have shared the mostly positive returns to ethanol blending over the past several years.”
Meanwhile, Bloomberg writer Jeff Wilson reported yesterday that, “Corn supplies in the U.S., the biggest grower, are shrinking at the fastest pace in almost four decades as improving demand from ethanol refiners drains reserves already diminished by drought.
“Stockpiles probably fell 38 percent in three months to 4.995 billion bushels (126.9 million metric tons) by March 1, the biggest drop since 1975, according to the average of 31 analyst estimates compiled by Bloomberg. AgResource Co. in Chicago and Northstar Commodity Investments Inc. in Minneapolis expect prices to jump 12 percent to $8.25 a bushel before supply rebounds with a record harvest in September.
“After idling refining capacity when corn reached a record in August, ethanol plants expanded output since January as falling grain costs and rising fuel prices drove profit margins to a nine-month high.”
Also, Amy Harder reported yesterday at National Journal Online that, “The top Republican and Democrat on the House Energy and Commerce Committee are finally on the same page about a controversial energy policy after reading from two completely different playbooks the last four years.
“Chairman Fred Upton, R-Mich., and ranking member Henry Waxman, D-Calif., are both undecided about what Congress should do about the renewable-fuels standard, a federal mandate established in 2005 that requires increasingly large amounts of biofuels each year to be blended with gasoline.
“‘I don’t have an immediate solution. I don’t have the answer,’ Upton said in a recent interview in his office. ‘But we’re going to have thoughtful hearings, first a couple of white papers. We’re going to see where people are. I have confidence that we’ll have a solution by going regular order.’”
Ms. Harder explained that, “The geographical and parochial interests shaping the debate over the biofuels mandate put Waxman and Upton on the same side of one of the most controversial issues Congress is poised to take up this year. The mandate is facing criticism from an informal–and unusual–coalition that includes the American Petroleum Institute, the Grocery Manufacturers Association, the National Chicken Council, and the Natural Resources Defense Council.
“While they’re not willing to admit it, both lawmakers seem open to reforming the policy, which has come under intense scrutiny from Republicans and Democrats alike in the wake of last summer’s record-setting drought that sent corn prices souring. Refineries that are required to blend biofuels with gasoline often use corn-produced ethanol to meet the mandate. Apart from providing fuel in the form of ethanol, corn also serves as a key feedstock to the poultry, pork, and cattle industries. More advanced biofuels made from products other than corn are not coming to market as quickly as the 2005 law had envisioned. On top of these concerns, the original intent of the standard—to wean America off foreign oil—has been trumped by the boom in oil and natural-gas production around the country in the last five years.”
Policy Issues: SNAP Participation; and, Animal Production Issues
Damian Paletta and Caroline Porter reported in a lengthy article in today’s Wall Street Journal that, “The financial crisis is over and the recession ended in 2009. But one of the federal government’s biggest social welfare programs, which expanded when the economy convulsed, isn’t shrinking back alongside the recovery.
“Enrollment in the Supplemental Nutrition Assistance Program, as the modern-day food-stamp benefit is known, has soared 70% since 2008 to a record 47.8 million as of December 2012. Congressional budget analysts think participation will rise again this year and dip only slightly in coming years.”
Today’s article pointed out that, “The biggest factor behind the upward march of food stamps is a sluggish job market and a rising poverty rate. At the same time, many states have pushed to get more people to apply for SNAP, a program where the federal government picks up the tab.
“But there is another driver, which has its origins in President Bill Clinton’s 1996 welfare overhaul. In recent years, the law has enabled states to ease asset and income tests for would-be participants, with the encouragement of the Obama administration, allowing into the program people with relatively higher incomes as well as savings.”
Meanwhile, in news regarding animal production, the Los Angeles Times editorial board indicated yesterday that, “A California Assembly bill that would require anyone who videotapes, photographs or records incidents of animal cruelty to turn over the evidence to authorities within 48 hours — or be charged with an infraction of the law — sounds like a tough new measure to crack down on abuse. It’s not.
“In reality, it’s one of a crop of disturbing ‘ag-gag’ bills being introduced across the country. Although AB 343 is not as bad as some others that ban outright recording and videotaping at animal facilities, it would effectively hamper animal welfare undercover investigators and employee whistle-blowers who are collecting information on systemic animal cruelty at meatpacking plants, slaughterhouses, livestock ranches and farms. It should be put out of its misery and killed quickly in committee.”
Former Food and Drug Administration commissioner David A. Kessler noted in an opinion column in today’s New York Times that, “While the F.D.A. can see what kinds of antibiotic-resistant bacteria are coming out of livestock facilities, the agency doesn’t know enough about the antibiotics that are being fed to these animals. This is a major public health problem, because giving healthy livestock these drugs breeds superbugs that can infect people. We need to know more about the use of antibiotics in the production of our meat and poultry.”
On a separate issue, Steven Yaccino reported in today’s New York Times that, “Here [Fair Oaks, Ind.] at one of the largest dairy farms in the country, electricity generated using an endless supply of manure runs the equipment to milk around 30,000 cows three times a day… The farm is now turning the extra manure into fuel for its delivery trucks, powering 42 tractor-trailers that make daily runs to raw milk processing plants in Indiana, Kentucky and Tennessee.”
And Bill Tomson reported in today’s Wall Street Journal that, “Oklahoma’s governor is expected to sign a new bill permitting horses to be slaughtered in the state to produce meat for human consumption, the latest salvo in a national debate over how to deal with wild and abandoned horses.”
Agricultural Economy: Weather and Wheat Condition, Ag Prices; and, Trade
In an article late last week at The Guardian Online, Suzanne Goldenberg reported that, “The historic drought that laid waste to America’s grain and corn belt is unlikely to ease before the middle of this year, a government forecast warned [last week].
“The annual spring outlook from the National Oceanic and Atmospheric Administration (NOAA) [from March 21] predicted hotter, drier conditions across much of the US, including parts of Texas, Oklahoma and Kansas, where farmers have been fighting to hang on to crops of winter wheat.”
In addition, the AP reported earlier this week that, “The continuing drought has struck hard at Nebraska’s winter wheat crop.
“The U.S. Department of Agriculture reports that in a survey of farmers so far in March, 61 percent of the wheat was rated poor or very poor. That compares with 4 percent rated poor or very poor last year at this time.”
Nonetheless, an update Tuesday from Texas A&M Extension reported that, “A large part of the Texas winter wheat crop could have been damaged by hard freezes March 24-26, according to a Texas A&M AgriLife Extension Service expert.
“‘Temperatures in the teens and low 20s appear to have been common in the Panhandle, and in the upper 20s and low 30s in the Blacklands on Sunday night and Monday morning,’ said Dr. Travis Miller, AgriLife Extension agronomist and Texas A&M University soil and crop sciences associate department head. ‘These temperatures are sufficiently cold to cause severe injury to wheat in advanced stages of growth.’”
A report earlier this week from the USDA’s National Agricultural Statistics Service field office in Texas indicated that 47% of the wheat crop was in poor or very poor condition.
The AP reported yesterday that, “Agricultural commodities closed higher Wednesday after a cold snap in the southern U.S. damaged winter crops.
“Wheat may be scarcer in the coming months because a hard freeze stretching from Tennessee to Texas killed some crops this week, analysts said.”
In addition, Ken Anderson reported yesterday at Brownfield that, “University of Nebraska-Lincoln (UNL) Extension is helping the state’s farmers prepare for the possible continuation of drought conditions in 2013.
“Associate dean for Extension at UNL, Rick Koelsch, says much of the focus has been on range and beef issues—helping cattle producers develop strategies to deal with reduced grass and forage resources.”
Meanwhile, USDA issued its monthly Agricultural Prices report yesterday, which stated in part that, “The corn price, at $7.18 per bushel, is up 14 cents from last month and 83 cents above March 2012 [related graph], the soybean price, at $14.50 per bushel, decreased 10 cents from February but is $1.50 above March 2012 [related graph], the March price for all wheat, at $7.66 per bushel, is down 31 cents from February but 46 cents higher than March 2012 [related graph] , and the March all milk price of $19.10 per cwt declined 40 cents from last month but is up $1.90 from March 2012 [related graph].
With respect to trade issues, Vicki Needham reported yesterday at The Hill’s On the Money Blog that, “Manufacturers want negotiators to target a reduction in tariffs and a smoothing of regulatory policies during U.S.-European Union trade talks as part of an effort to help create jobs and boost the economy.
“National Association of Manufacturers (NAM) President and CEO Jay Timmons sent a letter to President Obama on Wednesday calling for a reduction in trade barriers and costs while ensuring that any agreement does not impose new labor, privacy, environmental or other standards that could hamstring competitiveness.”
And a news release yesterday from Sen. Kirsten Gillibrand (D., N.Y.) stated that, “[Sen. Gillibrand], a newly appointed member of the President’s Export Council, today urged the President to exempt bulk shipments of apples to Canada from double inspection. Fixing this would help New York apple growers streamline operations and save money. Exempting bulk shipments of U.S. apples to Canada from double inspection required by the Apple Export Act would offer growers immediate savings of approximately $300 per truckload, and allow growers to create their own distribution schedules, eliminating costly after-hours inspection procedures.”
Roll Call writer Humberto Sanchez reported yesterday (“Obama Trusts Immigration Gang to Produce Bill”) that, “President Barack Obama told Spanish-language news that he has confidence in the ability of the bipartisan ‘gang of eight’ to produce a bill by early April and that he’s counting on it being ‘before the Senate’ next month.”
Yesterday’s article added that, “Indeed, four members of the group visited the Arizona border Wednesday and said they were making good progress.
“‘I’d say we are 90 percent there,’ said Sen. Charles E. Schumer, D-N.Y., during a press conference from the border Wednesday. ‘We have a few little problems to work on; we’ve been on the phone all day talking to our other four colleagues who aren’t here.’”
The Roll Call article also pointed out that, “Obama is traveling to Mexico and Costa Rica in May. He said his agenda is to promote trade relations between those nations and the U.S., particularly with Mexico, given his priority of enacting immigration reform.”
USDA: Rural Development Leader Stepping Down, Staff Changes
Julie Harker reported yesterday at Brownfield that, “After 12 years in leadership positions at USDA, [Under Secretary for Rural Development] Dallas Tonsager says he is moving on to the next chapter of his life.”