By Joe Dales, Farms.com
It would seem that the severe drought in the US could create an opportunity for opponents of the US Ethanol Mandate, which requires a large percentage of the corn supply to be processed into biofuel each year. The wide spread of drought has cut the yield potential of one of the largest corn crops ever planted in US history and resulted in a strong surge in corn prices to a record high of $8 per bushel and has created fear of a food crisis.
Combine with the growth in domestic energy output in areas such as North Dakota and Texas, which is eating into US dependence on foreign crude. Supporters of fuel made from corn have long used the foreign oil addiction as an argument for the ethanol mandate, known as the Renewable Fuels Standard, or RFS.
Livestock producers who must bear the burden of expensive feed costs complain that RFS, which requires petroleum blenders to use 13.2 billion gallons of corn ethanol this year is behind the rise in grain prices. So the meat industry is lobbying the Environmental Protection Agency to waive the mandate fully or partially for this year.
U.S. Agriculture Secretary Tom Vilsack told a press conference at the White House on Wednesday that the drought will spike crop prices. He also said beef and pork prices might rise late this year after rising in the short-term as ranchers and poultry farmers shrink herds and cull flocks. He also reiterated the USDA's forecast that the corn crop could still be the third largest on record due to large acreage planted this year.
The EPA mandate under the Clean Air Act was also embraced by President Barack Obama even before he hit the campaign trail for re-election and pushed an "all of the above" strategy on energy. Obama's blueprint lays out a future for oil, natural gas and wind and solar, but also for biofuels including ethanol made from corn.
Three of the swing states in the election, Ohio, Michigan, and Iowa, are top corn growing states, where voters might be against a move to reduce the commitment to ethanol, grain farmers and ethanol plant workers are a large motivated block of voters.
"The political cost that you would take on if you did abandon these programs is quite high still," said Divya Reddy, an energy policy analyst at the Eurasia Group, a risk analysis company. "It's easier to play it safe and not grant a waiver, unless food prices literally go through the roof."
Seeking to reform the law, lobbyists for poultry, beef and pork producers are fanning out across Capitol Hill, pleading their case to lawmakers that the mandate destroys profits and reduces the numbers of animals they can raise. One Good latte bill would kill the mandate outright. The other would set a formula to reduce the RFS when corn prices spike. The bills though, are stalled in the House of Energy and Commerce Committee, with limited backing. The measure to kill the mandate has 14 co-sponsors out of the 435 representatives and the bill to make it more flexible has 30 backers.
It’s unclear that the push to reform the mandate would fare any better if Mitt Romney won the presidency. Linda Stuntz, a lawyer who represented the Romney campaign in an energy debate last week, said she did not know whether he would push to reform the mandate due to the drought.
Reducing the Commitment to Corn Ethanol, Is There Much To Gain?
Beyond the politics, there are practical reasons to believe a waiver may not offer as much relief as some believe.
For their part, the ethanol industry says there is no need to reform the law because it already offers ethanol blenders a degree of flexibility in meeting their quota, allowing them to apply about a fifth of one year's surplus production against the following year's mandate.
"I don’t think there is a panic to change course on the RFS, I think they will let the market work through the drought issues and ration demand for corn." says Moe Agostino, a grain market analyst with Farms.com Risk Management.
For another, the EPA's fuel specification requires blending gasoline with some form of oxygenate, with ethanol being the cheapest and most abundant. Some experts say that even without the RFS oil companies would still be buying almost as much ethanol in order to meet those standards.
As corn prices hit record level highs some ethanol plants have stopped production thus rationing corn demand, which could dampen the impact of making the fuel on prices for the grain.