RFS Bright Spots

OMAHA (DTN) -- In the days following the U.S. Environmental Protection Agency's release of the final Renewable Fuel Standard volumes, most agriculture and biofuels industry groups sounded the alarm bells in response to numbers that came in below statute for corn ethanol.

Those final volumes represent a cut in overall biofuels production of nearly 3 billion gallons annually from what was originally set in the 2007 law. However, University of Illinois Agriculture Economist Scott Irwin said in a recent analysis corn ethanol and agriculture will reap rewards from the latest RFS volumes.

In an analysis, "IFES 2015: The Outlook for Conventional Biofuels is Brighter Than You Think," Irwin said EPA understands the carbon benefits of biofuels and in particular has set a course to put the RFS back on track.

The 2014-2016 RFS volumes for corn ethanol were set below statutory levels of 14.4 billion gallons, 15 billion gallons and 15 billion gallons in 2014, 2015, and 2016, respectively.

Although corn ethanol's statutory volumes were cut in the latest final rule, Irwin said EPA is signaling a willingness to push beyond the so-called blend wall where total ethanol production exceeds the limits of an E10 market.

"Even though many were surprised, the increases in the ethanol mandates in the final rulemaking were consistent with the stated intention of the EPA to have a 'push' in the mandates above the E10 blend wall," he said. "Language in the final rulemaking clearly confirmed this push strategy.

"The 2016 standards are expected to spur further progress in overcoming current constraints in renewable fuel distribution infrastructure, which in turn is expected to lead to substantial growth over time in the production and use of renewable fuels."

SILVER LINING

DTN/Progressive Farmer Ethanol Analyst Rick Kment said the RFS numbers should provide plenty of good news for rural America.

"The EPA revisions and changes to the RFS numbers are supportive to the ethanol industry both short term and long term," he said. "This continues to help not only build long-term support for the industry in terms of research and development of the industry, but also sustain current infrastructure and industry that already exists throughout the country."

Kment said the ability to increase gasoline demand through the last year and expected growth in driving is expected to also help to improve blending of ethanol with gasoline and "ultimately increase overall demand for ethanol year after year.

"Also, the development of more flexible-fuel vehicles and new vehicles that will be able to meet higher ethanol blending levels continues to be a factor in long-term levels of moving the blending wall above the 10% level."

Getting beyond the blend wall will be a "slow process," Kment said. However, as newer vehicles designed to handle E15 and higher blends enter the nation's automobile fleet, the use of ethanol will "gravitate" to higher blends.

Corn prices hovering near $3.50 per bushel or lower continue to be a "significant factor" in helping to divert public and private pressure away from the food-versus-fuel controversy in recent years.

"With lower grain prices, it is likely that less focus will be placed on the shift to replace the RFS system," Kment said.

GROWING FUEL DEMANDS

Irwin's analysis said the first RFS proposal for 2014 released on Nov. 30, 2013, assumed no demand growth for diesel and gasoline and a waiver for all cellulosic volumes. Since then, the fuel market has changed.

"The November 2013 proposal essentially put a ceiling on the conventional ethanol mandate of 13.01 billion gallons," he said. "Projecting this new framework over the remaining life of the RFS through 2022 implied very large cuts in the mandates, totaling 17.1 billion gallons for ethanol."

Irwin said the RFS language from November 2013 seemed to signal the "possibility of future cuts to the advanced mandates if meeting the advanced mandates would have necessitated substantial ethanol use above the E10 blend wall. The message from the November 2013 proposal was unmistakable -- very large cuts in RFS mandates relative to statutory volumes."

Fast forward to the final numbers released Nov. 30, 2015, when gasoline and diesel consumption rebounded because of lower crude oil prices and EPA sent what Irwin said are "strong signals" in the final rule.

The new RFS volumes favored "getting the ethanol mandate back to statutory levels as soon as possible, likely in 2017," he said, and increasing advanced biofuels because of climate benefits.

"The combined effect of the changes relative to the original proposal in November 2013 was to reduce the size of the cuts to the conventional ethanol mandates over 2014-2022 dramatically, from a total of 17.3 to just 1.9 billion gallons," Irwin writes. "The bottom-line is that the latest rulemaking from the EPA implies relatively modest cuts in the ethanol mandate and that these cuts will likely only be imposed for three years.

"In addition, there is nothing in the proposal that signals a willingness on the part of the EPA to cut the advanced mandate in the future. All in all, this represents a significant win for conventional and advanced biofuels and puts the RFS back on track to spur further growth in both types of biofuels production, especially biodiesel."

EPA has announced intentions to release proposed RFS volumes for 2017 by June 2016, with finalization on track for Nov. 30, 2016. In releasing three years' worth of volumes, EPA said it was putting the RFS back on track.

Todd Neeley can be reached at todd.neeley@dtn.com

Follow him on Twitter @ToddNeeleyDTN

(SK/AG)

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