RFS Being Challenged By Drought
Category: Renewable Energy
The 2012 drought has brought the Renewable Fuels Standard (RFS) into the forefront. The RFS regulations are managed by the U.S. Environmental Protection Agency (EPA), and those regulations are quite complicated. The RFS requires that minimum levels of renewable biofuels must be used to blend gasoline in the U.S. Corn-based ethanol is the primary fuel ingredient that is used to meet the RFS requirement. Currently ethanol makes up about 10 percent of the U.S. fuel supply, with just over 13 billion gallons of ethanol per year being produced in the U.S.
The 2012 drought in the U.S. has been significantly affecting nearly three-fourths of the major corn and soybean producing areas of the U.S. A large percentage of the primary crop growing areas in Illinois, Indiana, Iowa, Missouri, Nebraska, and Kansas remained in severe to extreme drought conditions in late August, with major reductions in crop yields expected. Portions of Wisconsin, North and South Dakota, and Southern Minnesota have also experienced some serious drought conditions.
The August USDA Crop Report estimated the 2012 total U.S. corn production to be 10.8 billion bushels, which would be the smallest total production since 2006. This compares to a total corn production of 12.3 billion bushels in 2011, and 13.1 billion bushels in 2009. Based on August 1 conditions, USDA is projecting a 2012 national average corn yield of 123.4 bushels per acre, which would be the lowest national average corn yield since 1995. The national average corn yield was 147.2 bushels per acre in 2011 and 152.8 bushels per acre in 2010.
The severity of the 2012 drought has lead for a call to either temporarily or permanently waive the RFS requirement for U.S. fuel blends. The request to waive the RFS requirement is coming from national livestock organizations, members of Congress, State Governors, food companies, media personalities and others. Most site the need to feed the corn to livestock, which is part of the U.S. and World food supply, rather than using the corn to produce renewable energy. At the same time, the National Corn Growers Association and several ethanol groups have called on EPA to continue the current RFS regulations, citing that the drought has caused the issues for livestock producers, rather than the RFS requirements. Thus far, the EPA has not made any variations or granted waivers for RFS regulations.
The corn and soybean market prices have responded to the U.S. drought with dramatic market increases. Chicago Board of Trade (CBOT) December corn futures prices rose to over $8.00 per bushel by late July, an increase of about $3.00 per bushel since mid-June, which is over a 60 percent increase. The biggest financial impact of the 2012 drought will hit livestock producers in all parts of the U.S., with varying degrees of loss from the disaster. The estimated cost of production for pork producers is expected to rise sharply in the third and fourth quarters of 2012. Based on hog futures prices in late July, many experts are now projecting a loss of about $20-$30 per hog marketed in the next 6-9 months. Similarly, the expected sharply higher feed costs are expected to result in large financial losses for the fed cattle and dairy industries in the coming months as well.
The higher corn prices have also re-ignited the “food vs fuel” debate that was quite prevalent in 2008, when corn prices first rose above $4.00 per bushel. Many are concerned that consumer food costs will rise rapidly in the next couple of years, and some are concerned with the increasing issue of human hunger in the U.S. and around the World. Due to this year’s drought, one difference in 2012 compared to 2008, is that we are not only looking at much higher feed prices, but we are also looking at serious feed shortages in many areas of the U.S., which is causing liquidation of breeding livestock.
The current estimated corn usage for ethanol is about 5.0 billion bushels for the coming year, which is about 40 percent of the total U.S. corn production at a production level of 12.5 billion bushels, which is well above current U.S. corn production estimates for 2012. It should be pointed out that ethanol production has slowed in some areas in the past few months, due to the higher corn costs and tighter profit margins, so total corn usage for ethanol may dip below projected levels.
Ethanol supporters feel that ethanol production is unfairly being totally blamed for the high livestock feed costs, and for potential increases in consumer food costs, citing the many other factors that contribute to those cost increases. Ethanol industry leaders point out that ethanol production also generates approximately 1.7 billion bushels of dried distillers grains (DDG’s), which is a high quality livestock feed source that is fed as an alternative to corn and soybean meal. Many ethanol experts feel that the feed use of DDG’s is not being properly included in ethanol corn-use calculations.
A recent study released by Iowa State University indicated that a partial or full waiver of RFS regulations may not achieve the goal of more corn availability for feed and lower feed costs that some are hoping for. The study indicates that the economics for using ethanol as an oxygenate in gasoline is driven more by gasoline prices and worldwide oil prices, rather than by the RFS regulations. They found that waiving the RFS would likely only have a short term impact of lowering the corn price by about 7.4 percent. The study concludes that as long as ethanol production is profitable, production will continue close to current levels, with or without the RFS requirements.
The debate over the RFS regulations is dividing farm organizations and members of Congress, and is pitting farmer against farmer. In some cases, it is pitting famers against themselves, if they are involved in both the livestock industry and the ethanol industry. It seems that what is needed is some sound analysis on the impacts of the drought on livestock producers and others, as well as on the implications of the RFS requirements. Maybe the conclusion will be that some temporary adjustments are needed in RFS regulations to address the serious situation; however, maybe the conclusion will be that there are better government programs available to assist livestock producers, rather than changing the RFS requirements.
In late May, there was concern that total U.S. corn production this year of over 14.0 billion bushels would lead to corn prices below breakeven costs by the end of 2012. Because of this Summer’s extensive drought, things have changed dramatically for crop and livestock producers, as well as for the ethanol industry !
Note --- For additional information contact Kent Thiesse, Farm Management Analyst and
Vice President, MinnStar Bank, Lake Crystal, MN. (Phone --- (507) 381-7960) ;