Monday, August 27, 2012

Drought's Effect on Corn May Push EPA to Waive Ethanol Fuel Mandate

A tanker loaded with ethanol leaves the Tall Corn Ethanol plant. A federal fuel requirement is expected to translate into more than 40 percent of the country's corn production this year. AP file

Higher corn costs, brought on by the most severe U.S. drought in 56 years, has renewed attention on the 5-year-old federal mandate to increase the amount of ethanol blended into gasoline. 

The standards call for 13 billion gallons of ethanol this year and almost 14 billion gallons next year. 

The U.S. Department of Agriculture earlier this month said the country's corn crop will be the worst in seven years. At the projected level, the ethanol-fuel requirement is expected to translate into more than 40 percent of the country's corn production this year. 

Not all corn used by the ethanol industry ends up in gas tanks. About a third of the corn is converted into livestock feed. 

Still, the high percentage in the midst of such a devastating drought has gained the attention of ranchers, chicken farmers and the United Nations director-general for food and agriculture, all of whom have called for the U.S. Environmental Protection Agency to waive the ethanol mandate this year. 

Ethanol remains cheaper than gasoline, which encourages refiners to use the biofuel even if the EPA ends the requirement. 

A 49 cent-per-gallon discount on gasoline provides companies including Exxon Mobil Corp. and Valero Energy Corp. a chance to profit by blending the corn-based additive into fuel while easing gas prices for consumers. 

Marketers may use ethanol as they look for the cheapest way to boost engine performance and reduce pollution. In autos, though, ethanol can be controversial, with critics saying it can be tough on some engine parts and may reduce overall mileage. 

The drought has prompted lawmakers from both parties to ask the Obama administration to suspend the mandate because of the potential impact on food costs. Ethanol will consume 42 percent of this year's corn crop, according to government estimates, up from 41 percent last year. The biofuel has been blended into more gasoline than ever this year, Energy Department data show. 

"It's just ingrained in the supply and distribution, and it's having a moderating effect on pump prices," John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone. "As long as they were still allowed to use it, most would. The lower price and just the logistics of taking it out, most would still use it." 

The biofuel recently has been selling for about 15 percent less than the gasoline with which it's mixed, known as RBOB, or reformulated blendstock for oxygenate blending. 

A 2007 U.S. law enacted under President George W. Bush known as the Renewable Fuels Standard, or RFS, requires refiners to mix 13.2 billion gallons of renewable fuels, such as ethanol, with gasoline in 2012 and 15 billion gallons by 2015. 

On an annual basis, production has averaged 13.6 billion gallons so far this year, above the target. Output has fallen 15 percent from a record 963,000 barrels a day, or a 14.8 billion gallon pace, as of Dec. 30. 

The U.S. had the hottest July ever, the government said Aug. 8. Just 23 percent of the corn crop was in good or excellent condition on Aug. 19, the worst assessment for this time of year since 1988, the Agriculture Department said Aug. 20. One bushel of corn makes at least 2.75 gallons of ethanol. 

Twelve GOP and 13 Democratic senators asked EPA Administrator Lisa Jackson, who enforces the program, to suspend or reduce the country's ethanol targets in an Aug. 7 letter because of the drought. 

That followed an Aug. 2 letter in which a bipartisan group of 156 U.S. lawmakers, led by Republican Rep. Bob Goodlatte of Virginia, asked the EPA to cut the requirements. Governors of North Carolina, Arkansas, Maryland, Delaware and Georgia have also called on President Barack Obama to halt the RFS. 

The EPA asked Monday for public comments on the waiver requests and said it has 90 days to make a decision. 

"This notice is in keeping with EPA's commitment to an open and transparent process to evaluate requests the agency receives under the Clean Air Act and does not indicate any predisposition to a specific decision," the agency said in the Monday statement. 

Alisha Johnson, an EPA spokeswoman, said Wednesday that the statement stands. 

"From the ethanol blending perspective, it puts ethanol back on the footing that it's a fuel used only if it's economical," said Sander Cohan, a global transportation fuels analyst. "It wouldn't be a complete crash. If you're an ethanol producer, you're a little nervous right now." 

The profit for making ethanol has tumbled as corn prices surged to $8.49 a bushel Aug. 10. The so-called crush spread, or profit from making ethanol from corn, for September contracts was minus 31 cents midway through last week, down from 17 cents in May.

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