RIN market signals change | A lower mandate would have reduced corn demand by 500 million bushels, says the Renewable Fuels Association
A looming threat to grain prices appears to be waning.
An analysis by an agricultural economist at the University of Illinois suggests the U.S. Environmental Protection Agency will reverse its plans to reduce the corn ethanol mandate.
Last November, the EPA proposed reducing this year’s mandate to 13 billion gallons from 14.4 billion retroactive to Jan. 1, which would have significantly affected this year’s corn demand, carryout and prices.
The value of renewable identification numbers (RIN) started to plunge in July, well in advance of the EPA announcement.
A RIN is a paper credit that blenders earned in previous years when they blended more ethanol than they were obligated to under the federal mandate.
They can use those credits or buy them from other refiners to meet current obligations without actually blending ethanol.
A RIN is worth less when the mandate is shrinking because there would be less demand for the product.
University of Illinois professor Scott Irwin wrote in his blog post for Farmdoc Daily that he believes it was more than coincidence that RIN values fell precipitously in advance of the EPA’s November announcement.
“The best explanation was that some RINs traders either had a remarkable ability to forecast EPA policy decisions or had access to EPA policy deliberations before the general public,” wrote Irwin.
The opposite trend is occurring today. Ethanol RIN values increased by nearly 50 percent between Jan. 27 and Feb. 5.
“Once again, the RINs market may be providing an early warning signal about a change in EPA policy,” said Irwin.
“RINs traders believe the odds of the EPA reversing the proposed write-down of the renewable mandate for 2014 in final rule making have increased sharply.”
The suspicion was reinforced by a Feb. 3 statement from EPA administrator Gina McCarthy at a meeting of the National Association of State Departments of Agriculture, where she spoke about the more than 15,000 comments the administration received on its proposal.
“I have heard loud and clear that you don’t think we hit that right,” she said.
“(The final rule will be) in a shape that you will see that we have listened to your comments.”
The Renewable Fuels Association said in an October blog that the proposed 1.4 billion gallon reduction in the ethanol mandate would reduce corn demand by 500 million bushels and result in 2.4 billion bushels of carryout.
The blog noted that Deutsche Bank said the EPA proposal would reduce corn prices by 20 to 25 percent, or about $1 per bushel. That would drop corn prices to about $3 per bu., the lowest level since fall 2009.
Rich Nelson, chief strategist with Allendale Inc., doesn’t think the full 500 million bu. of demand would be lost.
“We have to keep in mind that these (ethanol) producers have capacity to produce beyond that (mandated) amount and they would happily produce beyond that amount if they could export the excess,” he said.
Nelson believes the reduction in demand would be closer to 250 million bu. and that corn prices could fall by 30 to 50 cents per bu., which would still result in the lowest corn prices since 2009.
However, he suspects Irwin is correct and the EPA is about to reverse its proposal, which could boost corn prices.
He believes the recent rally in corn prices was partially fueled by market speculation that the EPA is about to backtrack on its plans. Prices could drift another 15 cents per bu. higher if the rumoured policy reversal becomes reality.
However, reduced mandates could be back on the table next year, even if there is a policy reversal, because of mounting pressure from the oil industry, food companies and livestock sector.
“That lobby is still much too strong to say that this is a done deal,” said Nelson.
There is no timetable for the EPA’s final ruling.