Ethanol and China. These were the two forces that drove the good times in agriculture a few years ago. They changed the market from one propelled mainly by fluctuations in supply to one driven mainly by new demand. Ethanol and China created what DTN Senior Analyst Darin Newsom called a demand market.
Alas, nothing lasts. Farmers know that all too well. Ethanol demand and Chinese demand remain strong, to be sure, but prices of corn and soybeans are nowhere near their boom-year highs. What happened is what usually happens in demand markets: After a few years, supply catches up. The demand market ends.
Today, a few years into another supply market, the drivers of the boom seem dangerously close to going into reverse. The Environmental Protection Agency is relieving small refineries of their legal obligation to support the blending of ethanol. China is targeting U.S. ag exports in retaliation for proposed U.S. tariffs on its products.
What could all this mean for corn and soybean prices? The markets aren't panicking, and for good reason: Both situations are fluid, susceptible to being made better or worse by fast-moving, hard-to-predict events. Depending on how negotiations go, China could back off or crack down. The White House could offer some new incentive for ethanol use to compensate for the EPA exemptions -- or not.
Yet there's enough happening here for farmers to worry about the future level of demand for their products from China and ethanol. I will write about China in a future post. Today, a few words about ethanol.
Let's start with the court case that the small refiners cite in their defense of the EPA's exemptions, Sinclair v. EPA (https://cases.justia.com/…). In it, the U.S. Court of Appeals for the Tenth Circuit said the EPA had misinterpreted the law in denying exemptions to the Renewable Fuels Standard to two small refineries in Wyoming. The court overturned the denials and instructed the EPA to reconsider Sinclair's petition using the court's interpretation of the law.
Ethanol interests say the EPA has been granting exemptions at double the pace of previous years (https://www.dtnpf.com/…). Is the agency doing this relying on the Tenth Circuit ruling in the Sinclair case? If so, there are several things about that case that need saying.
First, two other U.S. Appeals Courts -- the Eighth Circuit and the D.C. Circuit -- have reached a different conclusion about the validity of the EPA's statutory interpretation. The Tenth Circuit ruling attempts to distinguish those cases as different from Sinclair, but its attempts aren't terribly convincing. The public doesn't know where all the newly exempted refineries are located, but for any not in states under the Tenth Circuit's sway, the ruling wouldn't bind the EPA.
Even in considering petitions from Tenth Circuit refineries, the EPA would not be required by the Sinclair case to grant every petition. The statute requires a showing of "disproportionate economic hardship." The court said the EPA had read this to mean the refinery must demonstrate "an existential threat" --compliance costs at a level threatening its long-term viability. The EPA denied doing that, and the dissenting Tenth Circuit judge agreed, saying the agency uses "a more nuanced analysis," as required by the statute. If that's really the case, the EPA could deny similar petitions explaining more clearly the nuanced way it reached its conclusions.
Congress, it should be noted, didn't define "disproportionate economic impact." The Tenth Circuit interpreted those words to mean, "The EPA must compare the effect of the RFS Program compliance costs on a given refinery with the economic state of other small refineries."
Why other small refineries? Why not all refineries or all companies burdened with regulations, or some other disproportion? The court didn't explain its choice, but farmers might take some comfort from it, for it seems to suggest that the EPA could not grant exemptions to all 54 small refineries -- assuming, that is, that we're not in the oil-industry equivalent of Lake Woebegone, where all small refineries have above-average compliance costs.
The Sinclair case aside, there are other troubling aspects to the EPA exemptions. One is how stingy the agency has been with information about the exemptions. According to DTN's Todd Neeley, it has failed to respond to FOIA requests from ethanol groups and news media, including DTN. Iowa Republican Sen. Charles Grassley has complained that the EPA has "stonewalled" him.
Another is the EPA's exemption for small refineries owned by a big company -- Andeavor -- making a billion and a half dollars in profits (https://www.reuters.com/…). This may comply with the letter of the law, which focuses on individual refineries and not companies, but it seems abusively far removed from the law's spirit.
Most troubling is the exemption granted a refinery owned by Carl Icahn's CVR Energy (https://www.reuters.com/…). Before naming Scott Pruitt to head the EPA, then President-elect Donald Trump sent him to see Carl Icahn. In effect, then, Icahn helped Pruitt get his job, and now Pruitt's EPA is rewarding Icahn with regulatory relief to the tune of tens of millions of dollars.
Trump had given Icahn an unofficial position as adviser on regulatory policy, but he was forced out amid headlines crying conflict of interest. It seemed the main change in regulations he wanted to advise about was the obligation of refineres to blend ethanol. According to Reuters, which has done excellent reporting on RFS exemptions, "Icahn is currently under investigation by the U.S. Justice Department for his role in influencing biofuels policy while serving as Trump's adviser."
For this man to get this exemption at this time, then, is nothing short of breathtaking.
As I wrote last August, the billionaire's corporate adversaries have learned to their chagrin that what Icahn wants, Icahn gets (https://www.dtnpf.com/…). Now ethanol interests have received this education -- and received it from an administration that says it supports ethanol.
Corn farmers may well wonder what kind of support the administration will give them next.
Urban Lehner can be reached at firstname.lastname@example.org