Would an Ethanol Waiver Lead to Reduced Corn Prices?

The EPA will decide in November how much the mandate should be reduced and by when, if at all. Here's an analysis of the complex factors making the EPA's decision a hard one.

“This isn’t going to end beautifully,” Bill Lapp, the former chief economist for ConAgra Foods (CAG), told Minyanville last week. He was referring to the potential outcomes of the United States’ ethanol policy, which, in light of this year’s recent drought, has come into the crosshairs of policymakers, livestock producers, and uneasy consumers.

Intrigued by his warning, I’ve spent the past two days picking apart an academic paper commissioned by the Farm Foundation, a non-partisan agricultural research not-for-profit organization. “Potential Impacts of a Partial Waiver of the Ethanol (QEU12.NYM) Blending Rule” is the work of three Purdue University economists, and is the latest of only three academic reports to address the economic impacts of relieving the United States’ Renewable Fuel Standard (RFS) mandates in place since 2005.

The devastating effects of the United States’ fifth worst drought have seen the predicted corn (ZCU12.CBT) yield at its lowest level in 17 years, and spot-prices up around 60% since mid-June. Tighter supplies and higher prices have sparked concern among some who fear that the sizable 40% of the corn crop diverted to ethanol production is inflating prices even further. Ultimately, consumers fear this will trickle down to the price of food stocked on supermarket shelves.

On August 20, the Environmental Protection Agency kicked off a 30-day public comment period, seeking public opinion on how badly a waiver of the ethanol mandate is needed, what the effect of a waiver might be on ethanol demand and corn prices, and by how much the mandate should be reduced and by when. They’ve so far received requests from Governors of North Carolina, Arkansas, Delaware, Maryland, and Georgia, as well as a bipartisan group of 157 Congressional lawmakers – 31 Democrats and 126 Republicans – led by Rep. Peter Welch (D-VT), who has underscored the plight of the Vermont dairy farmer. This is in addition to requests from the UN Food and Agricultural Organization, and a meat and poultry industry group composed of the National Pork Producers Council, National Chicken Council, and the National Cattlemen’s Beef Association.

It would be a surprise if the Purdue report didn’t find its way onto EPA Administrator Lisa Jackson’s desk before November 13, when the EPA is required by law to make a decision on issuing a waiver. Note that this is nearly a week after the November 6 presidential election.

source: minyanville