RIN Stocks Part II – ‘Healthy’ Levels
by Rob Johansson and Seth Meyer (FarmDocDaily/USDA) Building on the discussion of RIN pricing and stock holding (here) we explore what a ‘healthy’ RIN bank may look like, estimate RIN stocks for 2014. The availability of RIN stocks will interact with final mandates for 2014 to affect price of RINs and likely carry-out decisions for 2014 and thus mandates beyond that. An analogy can be made to traditional stocks-to-use ratios in the grains markets. Stocks are used to help mitigate unforeseen supply or demand impacts on the market and serve as a buffer to price volatility. Increased information (decreased uncertainty) and fewer barriers to trade would effectively lower the need to maintain large amounts of stocks. Of course there are significant differences between grain stocks and RIN stocks: RINS are produced throughout the year and face a one-time demand each year at the end of the compliance period; whereas, grain stocks face continues demand throughout the year and face essentially a discrete supply (i.e., harvest). Nevertheless, less uncertainty about future mandates and less concern about fraudulent RINs (e.g., via a Quality Assurance Plan rule) and potential liability will lower the incentive to carry larger stocks of RINs and may impact the setting of future mandates.
Lowering of mandates will lower the anticipated stock needs. Similarly reducing uncertainty about future RFS policies will reduce the value of those stocks, leading to a lower optimal level of RIN carry-in. Plentiful RIN stocks will discourage current period RIN production and consumption feeding back into lower RIN stocks. Given the proposed method for setting future mandates, such an observation of scaled back production and consumption of biofuels in 2014, could lead to more conservative mandates (and lower expected RIN prices) in the future.
Such a ‘path dependency’ in mandates could work in the other direction too. If market participants expected more binding mandates in the future, there would be an incentive to build stock levels today despite higher RIN prices to offset compliance costs in the future and build out infrastructure in anticipation of more use. Observing increased production and consumption of biofuels in the current year, could translate to more aggressive mandates (and higher expected RIN prices) in the next year.
Therefore, RIN carry-over from 2013 could have long lasting impacts in the setting of future mandates. Biofuel RIN generation/consumption in 2013 appears to be higher than anticipated , resulting in significantly larger RIN stocks available to carry into 2014, adding flexibility to meeting the 2014 mandates. Further, mandate levels proposed for 2014 are lower than apparent consumption in the previous year in total and for biodiesel in particular, which would ease pressure on RIN stocks and contribute to lower RIN prices. As a consequence, the market may decide to drawdown RIN stocks, which are expected to be less valuable, to adjust to lower mandates, and potentially dropping biofuel production/consumption in 2014 even below the mandate levels. On the other hand, the market may build RIN stocks and approach the maximum 20 percent carry-in level
In either case, as suggested in the proposed rule, “…For years after 2014, if circumstances differ substantially from those described here, we [EPA] may again consider the existence of carryover RINs in the standard-setting process depending on the number of carryover RINs expected to be available and projections of supply and consumption of renewable fuels. We request comment on whether and how to account for carryover RINs in setting the standards…” READ MORE