Markets, Not Mandates, Shape Ethanol Production According to KC FedThu, 06 Dec 2012 10:27:38 CST
The 2012 drought has reignited the food versus fuel debate. In the latest issue of the Main Street Economist, Federal Reserve Bank of Kansas City economist Nathan Kauffman explores ethanol mandates and market-based demand for ethanol, concluding that markets, not mandates, will shape future ethanol production and its use of scarce corn.
After cutting U.S. corn production below recent years’ consumption, the drought sparked a U.S. grain shortage and sent global food prices soaring. As the grain shortage intensified, pressure to relieve the shortage by easing ethanol mandates mounted. Escalating ethanol mandates under the Renewable Fuel Standard (RFS), which fueled the expansion of the U.S. ethanol industry, will soon exceed the amount of ethanol than can be used in current U.S. gasoline blends.
Though some industry participants believe that a waiver of the mandate could reduce ethanol production and relieve high corn prices, a request the EPA recently denied for the 2013 mandate, Kauffman explains that ethanol production may not decline significantly from a temporary waiver. The RFS mandates stipulate ethanol blending for the next decade. A temporary waiver would not relieve the pressure on current production to build credits to satisfy future mandates.
In addition, the ethanol industry has become more market-based as production has exceeded the mandates in recent years. If energy prices rise faster than agricultural commodity prices, ethanol profits could expand and production could soar regardless of mandated levels. Finally, ethanol is the primary octane enhancer and fuel oxygenate, and there are few alternatives for U.S. oxygenate blends. High crude oil prices relative to corn prices and the use of ethanol as an octane enhancing fuel oxygenate should drive ethanol production going forward.
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