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DAVID KRUSE

By Staff | Oct 25, 2013

An unverified Environmental Protection Agency draft document, that was not released by the EPA, circulated the trade last week via newswire creating a wave of concern over the corn market.

The worry was that EPA planned to reduce the 2014 biofuels Renewable Fuels Standard. The release would have come from someone working with EPA to have claim to such information that likely did not have the interest of the ethanol industry at heart.

Almost the entire EPA was out on government furlough and I expect they were surprised by the release as well. If the document was real, its release broke some confidences if not some laws.

I expect that there are lots of drafts floating around EPA like the one proposing to tax bovine flatulence that are really not serious. That was touted as real too, but was never heard from again.

This one purportedly would reduce the ethanol RFS from 13.8 billion gallons to 13 billion gallons. The 2007 RFS actually stated that the 2014 corn based RFS should be 14.4 billion gallons so it has already been reduced from the original intent.

The industry has the capacity to produce 15 billion gallons because that was the plan that the infrastructure was sized to achieve.

One might ask, “Why this purported additional reduction?”

We have just gone from tight corn stocks and $7 corn to a burdensome carryover and $4 corn so that the corn stocks issue has now been muted.

There would certainly be no reason whatsoever not to fulfill the 15 billion gallon corn-based ethanol 2015 RFS objective based on the corn price and supply for some time to come.

We have had three years of sub-trend line yields, but planted enough acres to offset any weather impact this year.

It is unlikely that next year there would be a fourth consecutive sub-trendline yield so that we would not need as many acres, and the era of tight corn stocks should still have ended and all contention over the ethanol industry’s use of grain.

What criteria EPA would have to base a reduction in the ethanol RFS upon is unclear and perplexing. The oil industry has been complaining about the blend wall, but that is just incentive to expand E-15 retail market access.

There are also enough renewable identification numbers projected to more than cover any ethanol production shortfall. Why would there be a need for too many RINs with the price of corn having fallen so low in relationship to petroleum?

There is economic incentive to produce ethanol. Actually that is what the petroleum industry is deathly afraid of. Cheap corn is the feedstock from which they can make cheap ethanol.

If this document is a valid draft it is still not the official EPA proposal. There is certainly a lot of stupidity going around in Washington, and Einstein did say that the difference between genius and stupidity is that there are limits on genius.

Reducing the RFS now would be really stupid putting the EPA in the same camp as the rest of Washington. Stupidity doesn’t have any partisan limits either. The draft document looked like something that Big Oil would write.

There is no reason to reduce the corn-based RFS. There would be a further process to go through before the suggestion in the draft document would become the EPA rule. There has to be a comment period and what the document release did was gear the ethanol industry up to have its argument ready to go.

I watched the stock value of Green Plains Renewable Energy to gauge how serious the market took the news of the draft proposal that floated by, and after an initial knee-jerk it has quickly recovered holding up well.

There was no sense of alarm in that market. Even if the draft document was verified, I doubt that the proposal will become the rule. In actuality there is nothing in the RFS law that would allow the EPA to reduce the ethanol RFS for the reason of a blend wall.

The means to expand the blend wall exist and the confirmation that the corn-based RFS is 13.8 billion gallons going to 15 billion gallons, is what it takes to tell them to open the market access necessary to fill it.

The momentum behind installing new E-15 pumps is beginning to build and if EPA does what it should and goes with 13.8 billion gallons the momentum for more E-15 pumps will surge.

Vehicles newer than 2001 can use E-15 and most of them on the road are age eligible. E-15 is a safe fuel. They burn E-25 in all vehicles in Brazil for gosh sakes.

E-15 would expand the market access beyond the 15 billion gallon corn-based ethanol RFS to provide a market for cellulosic ethanol.

The blend wall doesn’t differentiate between types of ethanol so if they want a market for cellulosic ethanol the blend wall at 10 percent has to be expanded.

E-15 and blender pumps can do that.

What this is about is that the petroleum industry needs ethanol as an oxygenate and octane booster. They have nothing else that will compete with it.

They do not want to concede market share above 10 percent, however, and are trying to bring the EPA into league with them.

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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