RINsanity: Knowing ethanol’s contribution to corn values
If you grow corn, you know more about ethanol than the prior generation. But your knowledge of how ethanol is priced will not be as deep as the next generation. Because ethanol has been driving the price of corn for the past several years, your knowledge of the ethanol economy should be taken to the next level. That is because corn growers may have to fight harder to maintain the status quo, if they want to keep ethanol as a market for 5 billion bushels of corn. First lesson: RINs.
RIN: Renewable Identification Number, a 38 digit code assigned to every gallon of ethanol refined. A RIN is assigned by the Environmental Protection Agency as part of its task of administering the Renewable Fuel Standard (RFS) that says 10 percent of the motor fuel supply should be ethanol. And a RIN is part of that mechanism.
University of Illinois ag economist Nick Paulson explains that a RIN is created when ethanol is refined and the RIN follows the ethanol through its marketing and use, “When the ethanol is blended the RIN is then separated from the fuel and can be 1) applied immediately towards the obligated party's mandate for the current year (or applied to the previous year's mandate if the obligated party had borrowed in the previous period), 2) held or banked by the obligated party for future trading or application toward their mandate in the following year, or 3) traded/sold to another obligated party or a speculative RIN trader.”
RINs have been in the headlines lately, and that may have been your first awareness of their existence.
RINS have a value and they have been worth 1-4 cents per gallon since the inception of the RFS, since sometimes they are bought and sold by fuel blenders, ethanol refiners, and lately by speculators since they have recently become a traded commodity on the New York Mercantile Exchange (NYMEX).
That trading process since May has pushed RIN values to nearly $1.50 per gallon of ethanol. And the fuel blenders, who have to purchase them, are not happy and complained last week to Congress, pleading for changes in the RFS, since the RIN mechanism was “broken.” Whether or not the RIN process is broken, the plea by oil companies to change the RFS should be a call to arms for the corn and ethanol industries.
Now that RINs has been put in perspective, let’s look at “RINsanity” as the market has recently termed the explosive value of RINs. University of Illinois ag economists Scott Irwin and Darrel Good this spring have published a series of pieces in FarmDocDaily, looking at ethanol and all of the economic issues surrounding it. Their recent perspective on the reason for the wild pricing of RINs provides a surprise ending that ethanol advocates may not have seen coming.