Washington Insider -- Thursday

Biofuels Mandates Under Pressure

Here’s a quick monitor of Washington farm and trade policy issues from DTN’s well-placed observer.

Freedom Caucus Still Formulating Stance on House Farm Bill

No official position exists yet for the House Freedom Caucus relative to the farm bill approved by the House Ag Committee, caucus chairman Mark Meadows, R-N.C., told reporters Wednesday.

“At this point I think the decision is coming down between supporting the current farm bill with work requirements or doing an extension,” said Meadows. “I think that’s the debate that is out there.” While not yet having a formal position, Meadows indicated he does not know there is any division on the farm bill.

"Conversations have actually put people in a place where they are willing to consider it," he observed.

Meanwhile, House Ag Committee Chairman Mike Conaway, R-Texas, continues to work to find support for the measure, insisting that he just needs to find 218 votes. Indications are the bill could be headed for consideration on the House floor the week of May 7. But if it does not take place in that timeframe, contacts signal that likely means the votes are not there yet for the package.

Groups Welcome Lawmakers' Call for Canada Dairy Policy To Be Addressed In NAFTA 2.0

Elimination of Canada's protectionist trade policies for dairy, specifically its Class 7 pricing program, in ongoing North American Free Trade Agreement (NAFTA) renegotiations, is being called for by a bipartisan group of 68 House members.

"It is critical that the [Trump] administration achieves its goal of eliminating Canada's trade-distorting Class 7 program and dairy tariff walls," the lawmakers wrote in the letter to U.S. Trade Representative Robert Lighthizer. They noted the issue affects America's 40,000 dairy farmers along with almost three million workers employed in jobs connected to the dairy industry.

Canada's Class 7 system, which U.S. officials including USDA Secretary Sonny Perdue have asked be ended, has had a major negative impact on U.S. ultrafiltered milk exports and exacerbated a dairy glut in the domestic market. The program has "already led to a tripling of Canadian skim milk powder exports being essentially dumped onto world markets and eliminated US exports of certain dairy products to Canada," the lawmakers noted.

Dairy groups laud call for Class 7 elimination

"We commend the efforts of these congressmen for tackling Canada’s ever-expanding list of restrictive trade policies, which have had a negative impact on our U.S. dairy industry and the US economy overall," said Michael Dykes, president and CEO of the International Dairy Foods Association (IDFA). "Canada’s Class 7 milk pricing policy, implemented 14 months ago, artificially lowers milk ingredient prices and incentivizes the substitution of domestic Canadian dairy ingredients for imported ingredients. It also promotes the dumping of Canadian proteins onto world markets at below-market prices."

Washington Insider: Biofuels Mandates Under Pressure

The Dallas News and other media reported recently that “a politically charged debate over biofuels mandates is stirring anew.” The reason is that EPA has been “more generous” of late in giving "hardship" waivers to petroleum refiners. At issue is the renewable fuel standard, which requires a certain amount of ethanol and other biofuels to be blended into gasoline.

Oil state partisans, including certain refiners, have raged about a credit-trading market within the program that they say causes undue economic pain. The biofuels industry counters that those compliance credits, known as renewable identification numbers, are essential to making the mandate work.

While the battle has heated up in Congress — drawing the attention of Texas Republican senators Ted Cruz, R-Texas, and John Cornyn, R-Texas — the EPA has turned to a little-used provision to give the refiners some relief, the News said.

EPA in recent months has exempted a couple dozen refineries from their biofuel requirements for 2016 and 2017, according to press reports in the News, the Houston Chronicle, Reuters and other media outlets. That's far more exemptions than the EPA has granted in years past.

Among those to receive waivers is Dallas-based HollyFrontier, which saved nearly $58 million last year thanks to exemptions for two refineries in Wyoming and Utah.

"Our receipt of temporary waivers, as allowed under the RFS, for two small refineries pales in comparison to the punitive RINs costs for our company," said chief executive George Damiris, pointing out that HollyFrontier still spent $300 million on the biofuel credits last year.

The biofuels industry isn't happy about the waivers.

"President Trump made a commitment to our industry ... that he supported the renewable fuel standard," said Geoff Cooper, executive vice president of the Renewable Fuels Association. "But EPA is not following his marching orders on this program, and that's concerning."

Congressional leaders appear to be at loggerheads over what to do about the biofuel credits. Numerous White House meetings, including some with President Donald Trump, have produced no solution. The opposing factions can't even agree on the extent to which there is a problem, the News said.

The waivers have long existed for refineries producing less than 75,000 barrels a day that are suffering a "disproportionate economic hardship" from complying with the biofuels mandate. An EPA spokesman told the press that the agency "follows a longstanding, established process" to determine which refiners are eligible and that the criteria hasn't changed.

It is not clear just who has received waivers in all cases, the News says. Companies like HollyFrontier, which posted some $900 million in profits last year, disclosed the waivers in SEC filings. But privately held companies don't have to provide that information and EPA hasn't released any company-specific information, “further peeving the biofuels industry.”

Reuters, for instance, had to rely upon unnamed sources to report that San Antonio-based Andeavor, one of the nation’s largest refiners, received exemptions for three of its plants. Those waivers came even as the company posted profits last year of about $1.5 billion.

Even USDA Secretary Sonny Perdue has expressed concern, noting the waivers that he is aware of total at least 1 billion gallons. The waivers, he told lawmakers this week, represent "demand destruction."

At this time, news of the waivers has roiled the biofuel credit market, causing prices to drop, and could have a ripple effect on the political negotiations underway.

This is yet another fight affecting a large group of producers and important markets — just ahead of the fall elections. Both sides are deeply dug in and emotionally and politically committed and the administration will be hard pressed to find a way forward that will avoid further political combat. This is a struggle producers should watch closely as it proceeds, Washington Insider believes.

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