CoBank report explores outcomes of EPA’s changes to RFS

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Proposed changes to the nation’s biofuel blending obligations may have little impact on the ethanol industry in the next year or two, but could create uncertainty about the future size of the ethanol market and the long-term outlook for the industry, according to a new report from CoBank.

Since the Renewable Fuels Standard (RFS) was created by Congress in 2005, its purpose has been to mandate the inclusion of ever-greater volumes of biofuels into the U.S. motor fuel supply. In 2007, Congress revised the policy by doubling the corn ethanol blending requirements in the RFS. However, the Environmental Protection Agency is now proposing to pare back the RFS mandate because it can’t be met in 2014 given market conditions, including the fact that Americans are consuming less gasoline each year.

Under the EPA’s newly issued proposal, total biofuel blending obligations for 2014 would be roughly 3 billion gallons less than the standard, and the corn ethanol portion of the mandate would fall shy of the RFS by 1.4 billion gallons.

“Previously, the EPA was strongly against any alteration to the corn-based ethanol RFS provision,” said Dan Kowalski, lead economist for CoBank’s Knowledge Exchange Division. “Regardless of whether the current proposal is revised or becomes law, the implications of this shift in position are significant.”

The corn ethanol portion of the RFS will almost certainly be revised again in future years, but how it will be revised is far less certain, Kowalski said. Over the longer-term, that policy uncertainty, and the inevitability of further adjustments, will influence the size and profitability of the industry, the rate of capacity utilization, and ultimately the volume of domestic ethanol production.

According to Kowalski, the EPA proposal also sends a signal to fuel retailers that investments in higher ethanol blend infrastructure are not necessary. The proposed changes could prompt some well-positioned ethanol producers to look for opportunities to improve their economies of scale through acquisitions while some marginal producers might explore options to merge with other producers or be acquired.

The new report was issued by CoBank’s Knowledge Exchange Division, a knowledge-sharing practice that provides strategic insights regarding the key industries served by CoBank. Knowledge Exchange draws upon the internal expertise of CoBank, deep knowledge within the Farm Credit System and boots-on-the-ground intelligence from customers and other stakeholders to enhance the collective understanding of emerging business opportunities and risks.

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