Researchers analyze potential impacts of an RFS waiver
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WASHINGTON, October 5, 2012- The Food and Agricultural Policy Institute (FAPRI) at the University of Missouri analyzed some of the impacts of Renewable Fuel Standard (RFS) waiver options. The Institute issued the report in response to a request from USDA's Office of the Chief Economist, in order to assist the government in deciding if and how to adjust biofuel mandates in light of the 2012 drought.
The report, “Renewable Fuel Standard Waiver Options during the Drought of 2012,” suggests several outcomes, including that reducing the overall RFS has a small negative effect on the corn price during the current marketing year. Overall ethanol use would be almost as much even if there were no mandate, the researchers noted.
The analysis also suggested the waiver might have larger impacts on markets for crops harvested a year from now. A key question is if biofuel use during the waived years can count against future mandates. If so, then it will be less difficult to meet the larger and more challenging mandates in the future, according to FAPRI.
Additionally, FAPRI explained that biofuel use mandates interact with each other and with markets, leading to potentially offsetting impacts.
The researchers concluded waiving only the overall mandate leads to a reduction in the volume of conventional ethanol made from corn starch in domestic markets in 2012/13, and some of this reduction is offset by greater exports. If the advanced mandate is waived, then ethanol imports and exports are affected more than total domestic use. Waiving the advanced mandate can affect the advanced gap, leading to changes in imports of sugar cane ethanol that help meet this requirement.
“If US imports less ethanol, then world price is lower and the US is likely to export less conventional ethanol,” according to FAPRI. “These complications are a consequence of the two-way trade that has been observed in recent years and that we project to continue during the baseline period as long as the advanced mandate is more binding than the overall mandate.”
However, it is important to note the authors found “important uncertainties" in their analysis. One is the mismatch of marketing year corn data and calendar year biofuel mandates, which could be a source of error. Another is the nature of ethanol demand, particularly how quickly markets could shift back to fuels without any ethanol. A third uncertainty is about current market conditions.
“The markets for mandate compliance certificates reveal how difficult it is to meet mandates at present and in the near future, but they are newly created by the mandates and are not well understood at this point,” FAPRI stated.
Overall, the FAPRI's analysis suggests that effects of a 2012/13 mandate waiver might be greater in 2013/14 than in the year of the waiver.
“Rising mandates, combined with blend wall limitations on ethanol expansion, suggest that the mandates will tend to become increasingly binding over time,” according to the report.
A key concern in their analysis is the nature of rollover RINs, or credits, because they have a limited time period since the RFS began on which to base their conclusions.
“We believe that RIN rollover depends on current RIN values and next year's mandate, but our data about actual rollover in the few years since the RFS was started is implied by other data," FAPRI stated. "And it remains to be seen how much RIN rollover would be carried under different market conditions.”
Researchers assumed RINs generated in 2012/13, which are not used because of a waiver, can be applied in 2013/14. In their results, a waiver in 2012/13 causes the already low conventional RIN price in 2012 to drop to zero and has a larger absolute impact on the 2013/14 conventional RIN price, and correspondingly larger second-year effects on other markets.
FAPRI researchers concluded that their results stress the importance of the mandate hierarchy, delayed impacts that take place after a waiver, trade, and the interactions among biofuel and crop markets.
“However, there are important uncertainties about market behavior in the future, particularly about ethanol use, RIN rollover, and reconciling marketing year and calendar year information,” they noted.
To view the entire report, go here.
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