A new study by the Energy Research Policy Foundation, Inc. (EPRINC) further debunks the popular talking point of USDA Secretary Tom Vilsack and the Renewable Fuel Association (RFA) that ethanol reduced gasoline prices by $0.89/gal in 2010 and $1.09/gal in 2011.

As noted previously on this site (here and here), Vilsack and the RFA tout a study by Iowa State University’s Center for Agricultural Research and Development (CARD), which concluded that if ethanol production had remained at year 2000 levels, the U.S. motor fuel supply would have been billions of gallons smaller and, thus, significantly pricier in 2010 and 2011. Subsequent studies by FarmEcon, LLC and MIT/UC Davis spotlighted CARD’s unrealistic assumption that the refining industry would not have increased gasoline production to meet consumer demand in the absence of policies mandating and subsidizing the blending and sale of increasing quantities of ethanol as motor fuel.

The EPRINC study (Ethanol’s Lost Promise: An Assessment of the Economic Consequences of the Renewable Fuel Mandate) shows, in addition, that if ethanol output had remained constant at the year 2000 level, refiners could have made up for the shortfall without importing or even refining “a single additional barrel of crude oil.” The Renewable Fuel Standard (RFS) has increased ethanol production by about 400,000 barrels per day (bbl/d) since 2000. A “remarkably small operational adjustment” in refineries’ product mix – a 1.8% increase in gasoline production — could have covered an ethanol shortfall of 400,000 bbl/d in 2011.

Figure Explanation: The figure shows how much additional gasoline would be produced if yields were 1, 2 or 3 percentage points higher, given actual crude oil runs through U.S. refineries for the given year. The orange dotted line shows the increase in gasoline production if yields were raised by 2.3 percentage points – this is the range in which gasoline yields moved during 2000 to 2011. Finally, the red and bluelines are the amount of ethanol that would be missing from the market if ethanol blending was capped at 400,000 bbl/d. The chart demonstrates that a 400,000 bbl/d ethanol shortfall could have been covered in 2011 had gasoline yields been just 1.8 percentage points higher, from 45% to 46.8%. A 46.8% gasoline yield is equal to or lower than the gasoline yield during 3 of the past 11 years. It is also well under the 2.3 percentage point range in which yields bounced during 2000 – 2011.

The worst drought in 50 years has destroyed one-sixth of the U.S. corn crop. The USDA’s World Agricultural Supply and Demand Estimates (WSDE) report, released Friday, projects the smallest corn crop in six years and the lowest corn yields per acre since 1995.

As acreage, production, and yields declined, corn prices spiked. Last week, corn futures hit a record high of $8.29-3/4 per bushel.

If corn prices remain  high through 2013, livestock producers who use corn as a feedstock will incur billions of dollars in added costs. “These additional costs will either be passed on to consumers through increased food prices, or poultry farmers will be forced out of business,” warn the National Chicken Council and National Turkey Federation.

Even before the drought hit, corn prices were high. Prices increased from $2.00 a bushel in 2005/2006 to $6.00 a bushel in 2011/2012, notes FarmEcon LLC. A key inflationary factor is the Renewable Fuel Standard (RFS), commonly known as the ethanol mandate. Since 2005, the RFS has required more and more billions of bushels to be used to fuel cars rather than feed livestock and people.

Suspension of the mandate would allow meat, poultry, and dairy producers to compete on a level playing field with ethanol producers for what remains of the drought-ravaged crop. That would reduce corn prices, benefiting livestock producers and consumers alike.

EPA Administrator Lisa Jackson has authority under the 2007 Energy Independence and Security Act (EISA) to waive the RFS blending targets, in whole or in part, if she determines that those requirements “would severely harm the economy or environment of a State, a region, or the United States.” The pressure on her to do so is mounting.

On July 30, a coalition of meat, dairy, and poultry producers petitioned Jackson to waive the 2012 and 2013 RFS blending requirements. From the petition:

As detailed below, the extraordinary and disastrous circumstances created for livestock and poultry producers by the ongoing drought in the heart of our grain growing regions requires that all relevant measures of relief be explored and taken where possible. One of these measures must be the amount of grain utilized for the production of renewable fuel. The ongoing drought is taking an enormous toll on the nation’s corn crop. As we detail below, the 15.2 billon gallon  renewable fuel standard (“RFS”) in 2012 coupled with the prospect of a 16.55 billion gallon standard in 2013 will require the renewable fuels industry to utilize a major portion of the drought-limited available corn supply. The drought-induced reductions in the corn supply means that the mandated utilization of corn for renewable fuels will so reduce the supply of corn and increase its price that livestock and poultry producers will be forced to reduce the size of their herds and flocks, causing some to go out of business and jobs to be lost. In addition to this direct harm, these herd and flock reductions will ripple through the meat, milk and poultry sectors, causing severe harm in the form of more job and economic losses. This drought-induced harm exists now, will continue to exist into the latter part of 2012 and 2013, and could continue to be felt in 2014 depending on the policy choices made now.

On August 1, bi-partisan groups of 156 House Members  and 26 Senators sent letters to Jackson asking her to “adjust” the RFS targets in light of the drought and rising corn prices. The House letter argues, in part:

As you are aware, U.S. corn prices have consistently risen, and the corn market has been increasingly volatile, since expansion of the RFS in 2007. This reflects the reality that approximately 40 percent of the corn crop now goes into ethanol production, a dramatic rise since the first ethanol mandates were put in place in 2005. Ethanol now consumes more corn than animal agriculture, a fact directly attributable to the federal mandate. While the government cannot control the weather, it fortunately has one tool still available that can directly impact corn demand. By adjusting the normally rigid Renewable Fuel Standard to align with current market conditions, the federal government can help avoid a dangerous economic situation because of the prolonged record high cost of corn.

 On August 9, Secretary General of the U.N. Food and Agricultural Organization (FAO) Jose Graziano da Silva called for an “immediate, temporary suspension” of the mandate  to help avert a repeat of the 2008 food crisis.

Also on August 9, the Govs. of Delaware (Jack Markell) and Maryland (Martin O’Malley), both Democrats, sent Jackson a letter in support of the industry coalition’s petition. From the Governors’ letter to Jackson:

In 2012, more than 40% of the U.S. annual corn supply was to be used to meet the RFS corn based ethanol requirements established annually by the EPA. If you were to exercise your statutory authority to waive the RFS standards for the next year, it would make more than 5 billion bushels of corn available to the marketplace for animal feed and foodstuffs, driving down costs and significantly lessening the financial impact to Delmarva’s [Delaware-Maryland-Virginia] poultry farms and consumers. While there may be some who question the true price impact of waiving the RFS standards for a limited period, those debates are quantitative, not qualitative, as it is not in dispute that a waiver would put downward pressure on corn pricing. Given the likely impacts to the poultry industry, not to mention the increased cost of food for consumers, of this dramatic increase in price due to the undersupply of corn, it is hard to imagine any scenario when exercising your authority would be more appropriate.

There is, alas, little chance Jackson will waive any part of the RFS. That would be asking an executive agency to put economic rationality ahead of political calculation in a presidential election year. President Obama today makes his fifth visit to Iowa this year. Iowa, with six electoral votes, is the heart of corn country. Supporting a waiver to lower corn prices would spoil the President’s photo ops.

Today’s Greenwire (subscription required) reports that the USDA has announced it will purchase up to $170 million worth of meat, poultry, and catfish to help producers who have been adversely affected by high corn prices. The fix on offer is not to scale back regulatory excess but to expand corporate welfare.  

The question answers itself. Of course not. But that is the effect of the Renewable Fuel Standard (RFS), more commonly known as the ethanol mandate.

Under the RFS (Energy Independence and Security Act, p. 31), refiners must sell specified amounts of biofuel each year. The “volumetric targets” increase from 4.0 billion gallons in 2006 to 36 billion gallons in 2022. The amount of corn ethanol qualifying as “renewable” maxes out at 15 billion gallons in 2015. Already, ethanol production consumes about 40% of the annual U.S. corn crop.

By 2022, 21 billion gallons are to be “advanced” (low-carbon) biofuels, of which 16 billion gallons are to be made from plant cellulose. But with cellulosic ethanol proving to be a complete dud, corn growners and ethanol producers are lobbying to redefine corn ethanol as ”advanced.” If they succeed, mandatory sales of corn ethanol could significantly exceed 15 billion gallons annually.

In any event, the RFS sets aside a large and increasing quantity of the U.S. corn crop each year for ethanol production regardless of market demand for competing uses — and heedless of the potential impacts on food prices and world hunger. No matter how much of the U.S. corn crop is ruined by drought, no matter how high corn prices get, no matter how many people in developing countries are imperiled, the RFS requires that billions of bushels of corn be used to fuel cars rather than feed livestock and people. This is crazy.

Corn futures hit their all-time high this week, exceeding $8.00 per bushel. Soybean prices are also at record levels. More than 1 billion of the world’s people live in absolute poverty (defined as an income of less than $1.25 per day). When prices for staple commodities soar, millions of people can be pushed to the brink of starvation.

As noted yesterday on this blog, simply adding some flexibility to the RFS, so that the volumetric targets automatically scale back whenever corn reserves fall below critical thresholds, could help alleviate the surge in grain prices. Predictably, the corn lobby and USDA Secretary Tom Vilsack oppose this modest reform.

Even if made more flexible, the RFS would still flout a bedrock principle of our constitutional system: equality under law. Why as a matter of law should ethanol producers get first dibs on the U.S. corn crop? Why should their interest legally trump that of every other industry and consumer affected by corn prices? Why should they have a legal privilege to jump to the front of the line ahead of meat, poultry, and dairy producers, or those who export grain to hunger-stricken countries?

The ethanol lobby claims the RFS does not limit the availability of corn for other uses. The numbers indicate otherwise. As corn use for ethanol increased from 1.6 billion bushels in 2005/2006 to 5.0 billion in 2011/2012, use of corn for feed declined from 6.2 billion to an estimated 4.6 billion bushels, and corn exports declined from 2.1 billion to an estimated 1.7 billion bushels (FarmEcon LLC report, p. 19). The RFS turns a large and growing share of a major commodity into the exclusive preserve of one industry. This is not the American way.

Today, FarmEcon LLC released RFS, Fuel and Food Prices, and the Need for Statutory Flexibility, a study of ethanol’s impact on food and fuel prices. FarmEcon prepared the study for the American Meat Institute, California Dairies Inc., Milk Producers Council, National Cattlemen’s Beef Association, National Chicken Council, National Pork Producers Council, and National Turkey Federation.

The study argues that the Renewable Fuel Standard (RFS), commonly known as the ethanol mandate, is detrimental to both non-ethanol industry corn users and food and fuel consumers. The program should therefore be reformed. The RFS has “destabilized corn and ethanol prices by offering an almost risk-free demand volume guaranty to the corn-based ethanol industry.” Consequently, food producers who use corn as a feedstock “have been forced to bear a disproportionate share of market and price risk” when corn yields fall and prices rise. This has become painfully obvious in recent weeks as drought conditions in the Midwest depress yields and push corn prices to record highs.

Appropriate reform* would assure food producers ”automatic market access” to corn stocks “in the event of a natural disaster and a sharp reduction in corn production.” Ethanol producers should “bear the burden of market adjustments, along with domestic food producers and corn export customers.” The study also recommends that the RFS schedule ”be revised to reflect the ethanol industry’s inability to produce commercially viable cellulosic fuels.”

Pretty tame stuff. An argument for flexibility to avoid the RFS’s worst market distortions and the cellulosic farce rather than an abolitionist manifesto. Nonetheless, the study paints a fairly damning picture of the RFS as a whole:

• Increases in ethanol production since 2007 have made little, or no, contribution to U.S. energy supplies, or dependence on foreign crude oil. Rather, those increases have pushed gasoline suplies into the export market.
• Current ethanol policy has increased and destabilized corn and related commodity prices to the detriment of both food and fuel producers. Corn price volatility has more than doubled since 2007.
• Following the late 2007 increase in the RFS, food price inflation relative to all other goods and services accelerated sharply to twice its 2005-2007 rate.
• Post-2007 higher rates of food price inflation are associated with sharp increases in corn, soybean and wheat prices.
• On an energy basis, ethanol has never been priced competitively with gasoline.
• Ethanol production costs and prices have ruled out U.S. ethanol use at levels higher than E10. As a result, we exported 1.2 billion gallons of ethanol in 2011.
• Due to its higher energy cost and negative effect on fuel mileage, ethanol adds to the overall cost of motor fuels. In 2011 the higher cost of ethanol energy compared to gasoline added approximately $14.5 billion, or about 10 cents per gallon, to the cost of U.S. gasoline consumption. Ethanol tax credits (since discontinued) added another 4 cents per gallon.

Some other key points presented in the study:

• Ethanol typically sells for less per gallon than gasoline, but “engines do not run on gallons, they run on energy,” and a gallon of ethanol has only 67% of the net energy in a gallon of gasoline.
• Consequently, on a per-mile basis, ethanol is more expensive than gasoline. This accounts for the failure of E85 (motor fuel blended with 85% ethanol) to achieve significant sales. ”According to recent Department of Energy statistics, ethanol blends of more than 55 percent account for only 2,000 barrels per week out of total gasoline production of about 8.7 million barrels per week.”
• The RFS has dramatically altered U.S. corn markets. Corn prices have increased from $2.00 a bushel in 2005/2006 to $6.00 a bushel in 2011/2012. Corn use for ethanol increased from 1.6 billion bushels in 2005/2006 to 5.0 billion in 2011/2012. Feed use of corn declined from 6.2 billion bushels in 2005/2006 to an estimated 4.6 billion in 2011/2012. Corn exports declined from 2.1 billion bushels in 2005/2006 to an estimated 1.7 billion bushels in 2011/2012.
• The RFS creates risks as well as benefits for ethanol producers. “Since the first RFS schedule in 2005, the corn cost in a gallon of ethanol has increased from about 50 percent to more than 80 percent of total ethanol production costs. Corn costs for ethanol producers have also been much more volatile. . . .This higher volatility [after the 2007 RFS] has increased business risks for all corn users. The result has been the bankruptcy of a number of ethanol companies and food producers.”
• Corn is a key commodity used by meat, poultry, and dairy producers. Corn prices also influence wheat, soybeans, and other commodities, because corn competes with those crops for customers and/or land. The cost of corn, wheat, and soybeans used in U.S. food production has risen from $26.5 billion in 2005, when the first RFS was enacted, to $69.5 billion in 2011. “The cumulative cost increase over 2005-2011 was $141.9 billion.” Higher energy prices also played a significant role. Nonetheless, the RFS mandates were an important factor.
• The cost of food has increased much faster than overall inflation since the 2007 RFS was enacted. “Overall price inflation of items other than food, even including energy, declined dramatically after December, 2007. The decrease was largely due to the 2008-2009 recession. In 2005 to 2007, food prices were increasing slower than all items other than food. However, post-RFS food price inflation accelerated, even in the face of the recession.”
• “Higher corn prices (and associated increases in wheat and soybean prices) have dramatically raised the costs of producing meat and poultry.” Unspurprisingly, per capita meat and poultry consumption “has declined to the lowest level since 1990.”
• Like the MIT study I reviewed earlier this week, the FarmEcon study rejects the ‘finding’ of Iowa State University researchers that ethanol, by expanding the U.S. motor fuel supply, reduced the crack spread (refiner profit margin) by $1.09 per gallon in 2011, sparing consumers an equivalent increase in pain at the pump.
• FarmEcon offers a critique based on statistical models but also presents an Econ 101 argument: “The 2000-2011 average gasoline crack price spread was 27.8 cents per gallon. The 2011 margin averaged 37.1 cents. A $1.09 increase in that margin would lead to refineries quickly increasing gasoline production and reducing gasoline exports. The increase in gasoline supply available to the U.S. market would largely, likely entirely, wipe out the higher gasoline price.” In other words, the market is self-correcting. Refiners don’t need big-daddy government to tell them to produce more fuel when demand increases faster than supply and prices rise.

* The reform examined in the study, proposed by Rep. Bob Goodlatte (R-Va.), would relax the RFS targets as the corn stocks-to-use ratio declines below 10%. Stocks-to-use measures the quantity (“stock”) of a commodity at the end of a particular time period as a percentage of total use of the commodity during that time period. TradingCharts.Com explains how a stocks-to-use ratio is calculated.

The stocks to use ratio indicates the level of carryover stock for any given commodity as a percentage of the total demand or use. The mathematical formula for this relationship is as follows:

 Beginning Stock + Total Production – Total Use ÷ Total Use

. . . . beginning stocks represent the previous year’s ending or carryover inventories. Total production represents the total grain produced in a given year. Total usage is the sum of all the end uses in which the stock of grain has been consumed. This would include human consumption, export programs, seed, waste, dockage and feed consumption. By adding carry-over stocks to the total production you will obtain the total supply. From the total supply, subtract the total use and the resultant figure will be the year ending carryover stock. The carryover stock divided by the total usage can be expressed as a ratio which when compared with previous years gives the market analyst an indication of the relative supply/demand balance for a particular commodity. This ratio can then be used to indicate whether current and projected stock levels are critical or plentiful.The ratio can also be used to indicate how many days of supply are available to the world marketplace under current usage patterns ( eg. a 20% stocks to use ratio for wheat indicates that there are 75 days supply of wheat in reserve).

TradingCharts.Com notes that historical stocks-to-use data provide “bench mark ratios” useful for predicting movements in commodity prices: “On a world basis a stocks/use ratio for wheat under 20% has typically led to strong price advances. For corn, the comparable number appears to be under 12% . For soybeans, the critical level is below 10%.”

The Goodlatte proposal adjusts the RFS targets as follows:

• No reduction in the mandated quantity of renewable fuel if corn stocks-to-use is above 10%;
• a 10% reduction if stocks-to-use is 10.0%-7.5%;
• a 15% reduction if stocks-to-use is 7.49%-6.0%;
• a 25% reduction if stocks-to-use is 5.99%-5.0%; and,
• a 50% reduction if stocks-to-use is below 5%.

According to FarmEcon, corn stocks-to-use in 2010/2011 was 6.2% and in 2011/2012 is 6.7%. In both crop years, the RFS target would be reduced by 15% under Goodlatte’s proposal.