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DAVID KRUSE

By Staff | Aug 24, 2012

Ethanol opponents recognized the opportunity created by a crisis mentality by the 2012 drought to damage the ethanol industry.

The oil industry doesn’t like losing market share to ethanol and livestock moguls want cheap corn to feed.

There is a drought. Corn production is lost. Corn prices go up. The remedy? Blame ethanol. Derail renewable fuels, create a glut of corn.

It’s a simple plan and objective.

They went after the blender’s credit and the ethanol industry decided to let it go. It is a political hypocrisy, however, that oil subsidies continue.

Oil subsidies are somehow sacrosanct.

We knew that ethanol opponents wouldn’t be happy with just eliminating the blender’s credit as long as the Renewable Fuels Standard was intact.

They have been waiting for an opportunity to gut the RFS and the drought gives them their opening.

The drought will drastically reduce the corn supply despite farmers having responded to corn demand, planting 95 million acres.

What RFS opponents don’t say is that there is a lot of flexibility built into the RFS to accommodate a short crop.

There are more than 2.4 billion renewable identification numbers that blenders can use to satisfy their RFS obligations.

Every gallon of ethanol produced gets a RIN attached to it. The 2.4 billion-plus RINs that represent gallons of ethanol produced exceeded the RFS that have not been cashed in, so to speak.

These RINs can be counted toward the 13.2-billion gallon 2012 RFS obligation.

Iowa State University’s Center for Ag and Rural Development Director Bruce Babcock said, “The 2.4 billion gallon amount of flexibility assumed in this study lowers the corn price impact of the ethanol mandate in this drought year from $1.19 per bushel to 28 cents per bushel.

“This means that relaxing the mandate further would have modest impacts on corn prices.

“If the current price of ethanol accurately represents the value of the product to blenders, ethanol plants will continue to compete for corn even without a mandate.

“The desire by livestock groups to see additional flexibility in ethanol mandates may not result in as large a drop in feed costs as hoped.”

Sen. Chuck Grassley, R-Iowa, did a great job in responding to Smithfield Foods’ CEO, Larry Pope’s disparagement of ethanol. “I may start referring to Mr. Pope as Henny Penny. Every time Smithfield has to pay a little more to America’s corn farmers to feed his hogs, Mr. Pope starts up with the same argument that the sky is falling and it’s all ethanol’s fault,” Grassley said.

In his article, the Smithfield chairman displays a basic lack of knowledge about ethanol, Grassley said, and that Pope perpetuates the myth that ethanol consumes 40 percent of the U.S. corn crop, or more than animal agriculture.

“But that does not account for the co-products of the ethanol process which have become an integral part of livestock feeding,” Grassley said. “I would imagine that millions of hogs raised by Smithfield every year are fed a diet containing this ethanol co-product. Mr. Pope appears unaware of its existence.”

With distiller’s grains factored in, 43 percent of the corn supply is available for animal feed and 20 percent for ethanol. Grassley also took issue with Pope’s statement that if ethanol did not exist, there would be plenty of corn even in a drought year like 2012.

“I’d like to ask Mr. Pope, why do you think that is? Why did farmers plant 96 million acres of corn this year? The answer is simple: Ethanol,” Grassley said.

For big corn users like Smithfield, opposition to the RFS is easy to understand. “It comes down to dollars,” Grassley said. “For nearly 30 years, until about 2005, companies like Smithfield had the luxury of buying corn below the cost of production.

“Corn prices remained at about $1.50 to $3 per bushel for nearly 30 years. Farmers routinely lost money,” Grassley said.

I think Grassley hit every point that I have been making in many CommStock reports.

Along with the RINS, the ethanol industry has about 800 million gallons of ethanol in reserve. The reduced level of ethanol production, use of ethanol reserves and the RINS available to blenders really deflates the impact of the RFS on the corn market. I have pointed out that when the ethanol industry uses a bushel of corn, it gives back a third of that bushel to feed. When we export a bushel, it is gone completely. Why would livestock industries not want exports discouraged first?

U.S. Ag Secretary Tom Vilsack is defending the RFS, but is warning farmers to stand up for it. Vilsack said that the market will sort out demand and it will.

If ethanol production is reduced by modifying the RFS, consumers will see gas prices jump at the pump which is another reason why the petroleum industry wants to kill ethanol.

It will profit from higher gas prices and increased market share from the demise of ethanol.

Vilsack is telling EPA the waiver is not needed. The EPA may not respond to the requests for the waiver.

A response may be a 60- to 90-day comment period.

Nothing is going to happen short term and if Obama is re-elected, nothing is likely to happen to the RFS after the election either.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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