by Ned Stowe (Environmental and Energy Study Institute) In the wake of the devastating heat wave and drought which covered much of the United States this year, it has become clear that there will be less corn available on the market for the remainder of the year and for much of 2013 than there had been in recent years. Livestock, poultry, and ethanol producers already have been hit especially hard by the sharp increase in the price of corn, because corn comprises such a large portion of their production costs. Many livestock and poultry producers have had to liquidate herds and flocks as pastures and forage crops withered, and a number of ethanol producers have had to shut down or curtail production at plants. Further effects will be rippling through the U.S. and global economy in the months ahead.

The question of who will have to cut back on corn consumption in the year ahead has become as much a political question as it is an issue for the market to resolve. Several governors from livestock and poultry producing states, with support from the meat, poultry, and food processing industries, are calling on the Administrator of the Environmental Protection Agency (EPA) to waive some or all of the Renewable Fuel Standard (RFS) for the remainder of 2012 and 2013. Since most renewable fuel today is made from corn, they argue that waiving the RFS would reduce demand for corn significantly, thereby making more available at lower prices for meat and poultry producers and food processors. This in turn, they submit, would benefit consumers who otherwise will face much higher food prices in the months ahead. They say the RFS creates an inflexible demand for corn that is not responsive to higher prices, and that it thus forces meat and poultry producers, food processors, and consumers to bear a disproportionate share of the cost of the extreme weather and a short crop.

However, these issues are much more complex than often portrayed. This issue brief explores some of the questions relating to the impacts of the heat wave and drought on corn and ethanol production, what the RFS entails, and the potential impacts of an RFS waiver on various national priorities.

• How much damage did the heat wave and drought cause to the corn crop this year?
• What will be the economic impact of the extreme weather?
• How is the U.S. corn crop used?
• What does the Renewable Fuel Standard (RFS) require?
• Why so much corn ethanol in the RFS?
• What authority does the Environmental Protection Agency (EPA) have?
• How much corn would it take to meet the 2013 RFS?
• Is the corn ethanol industry responding to higher corn prices without an RFS waiver?
• Does the RFS provide any flexibility to refiners in years such as this when there is a short crop?
• Would an RFS waiver reduce corn prices in time to help struggling livestock and poultry producers?
• What would be some economic costs of an RFS waiver?
• What would be the effect of an RFS waiver on fuel prices, fuel imports, and energy security?
• How would an RFS waiver effect the commercialization of advanced next generation biofuels?
• Concluding thoughts about the RFS and the waiver request

… The primary use – more than 60 percent – of the U.S. corn crop is for animal feed. In 2011, this included 36.3 percent which went directly for animal feed; the equivalent of another 12.2 percent in the form of dried distillers grains (DDGs) (a high protein, animal feed co-product of ethanol production); and about 13.0 percent in exports to other countries primarily for animal feed. In addition, a net of about 27.3 percent of the crop was used for ethanol production (after subtracting the DDGs). About 4.1 percent was used to produce high fructose corn syrup. And the remaining 7.1 percent was used for processed food (such as corn starch, corn oil, cereal, and corn meal), bio-based products, seed, and carry-over stocks, according to the NCGA, based on USDA data.

…When the RFS was expanded in 2007, Congress assumed that corn ethanol would be the primary biofuel that refiners would use for the first several years. Advanced biofuels were expected to come later, as new technologies, biomass crops, and production systems were developed. Building out the corn ethanol industry, infrastructure, and markets would prepare the way for the introduction of the new, more environmentally sustainable and more climate-friendly advanced biofuels.

…Refiners currently have about 2.5 billion gallons worth of renewable fuel blending credits which they can carry over and apply against the RFS requirements in 2012 or 2013. If they used blending credits instead of purchasing more ethanol, it would reduce corn demand by more than 850 million bushels. In addition, refiners have the flexibility to defer blending ethanol in one calendar year to the following year, according to the EPA.

Furthermore, reduced ethanol exports and increased imports are other ways that the global ethanol market is responding to higher corn prices in the United States. This also would result in reduced demand for corn.     READ MORE  and MORE (Baltimore Sun) and MORE (25 x ’25) and MORE (World Biofuels Markets News)   Download Brief