(Bloomberg) -- Based on his own back-of-the-envelope calculations, Minnesota farmer Kirby Hettver could lose tens of thousands of dollars of earnings because of President Donald Trump.
But damaging as the brewing trade war with China may turn out to be for Hettver and other American soybean farmers, he says the greater financial impact could come if Trump moves ahead with changes to the U.S. ethanol mandate, known as the Renewable Fuel Standard, or RFS.
While proposed tariffs announced by China last week would apply to about $14 billion a year of U.S. soybean exports, the RFS accounts for 38 percent of the U.S. corn crop, valued at about $21 billion at current prices. And unlike the situation in the soybean market, where other buyers could pick up the slack for a drop in Chinese demand, the undoing of U.S. biofuel laws could lead to real demand destruction.
Farmers “thought they were voting for an administration that was supportive of rural America,” and now they’re anxious, said Wallace Tyner, an economist at Purdue University in West Lafayette, Indiana.
The RFS requires oil refiners to blend ethanol, mostly made from corn, and biodiesel, derived from soybeans, with petroleum. In the 13 years since its inception, the mandate has been a key driver for grain demand. But the oil industry has taken issue with the law, saying that it’s too costly to comply with.
Trump vowed his support for the RFS during campaign rallies in Midwestern states like Iowa, the leading U.S. corn grower and ethanol producer. He has repeated the pledge since taking office, and last fall ordered Environmental Protection Agency Administrator Scott Pruitt to back down on possible changes to the law.
Then in January, the largest U.S. East Coast oil refiner filed for bankruptcy and blamed the cost of complying with the mandate. That thrust the issue back onto the political agenda and spurred Trump to hold meetings -- the most recent one on Monday-- in an attempt to carve out a deal between the oil and agriculture lobbies.
The National Corn Growers Association, along with other groups, had its members send a barrage of tweets to Trump ahead of Monday’s meeting, reminding him of his promise to uphold the law.
The threat to ethanol demand comes as the rural economy is already suffering from years of crop gluts. The oversupply sparked a prolonged rout for grain prices, and U.S. farmer incomes are projected to fall to a 12-year low in 2018. At the same time, China has retaliated to Trump’s hard-line stance on trade with a plan for duties on about $50 billion of U.S. imports, including a host of agriculture products.
On Monday, Trump acknowledged the impending pain that farmers may feel from the trade war. “Our farmers are great patriots,” Trump said to Washington reporters. “They understand that they’re doing this for the country. We’ll make it up to them.”
Trump Vows Farmers to Be ‘Better Off’ Because of Trade Fight
Farmers like Hettver see the trade impact from China’s duties as more of a done deal, but are holding out hope that Trump will stand by his ethanol pledges and spare them extra hardship.
“I hope he holds that promise because after what’s happened with the tariffs, we really need the RFS,” Hettver, who’s also president of the Minnesota Corn Growers Association, said in a telephone interview. “We’ve been tightening our belts for five years.”
Some oil refiners are using the meetings with Trump to push for a ceiling on the price of Renewable Identification Numbers, or RINs. Refiners without the capability to blend ethanol or biodiesel to meet the annual consumption targets under the law have to buy the credits. Prices have been volatile amid the Washington meetings.
Hettver cited studies, including one from Iowa State University in Ames, that a cap on RINs would lower the price of corn. Based on his average annual yield, he says that means he has “$50,000 at risk.” Meanwhile, the Chinese duties could mean a hit of $23,000 to his soy profits.
In an April 6 letter to Iowa’s Republican Senators Chuck Grassley and Joni Ernst, ethanol proponents in the state, including Archer-Daniels-Midland Co. and Green Plains Inc., urged the legislators to tell Trump that a cap would be “viewed as nothing less than a declaration of war on rural America and a complete abdication of his repeated promises to protect the RFS.”
The coalition also called for Trump to approve the year-round sale of higher blends of ethanol, “in light of the harmful Chinese tariffs on the Midwest farm sector.”
In an April 6 statement, Grassley also referenced the trade spats and said that any waiver or caps on the credits would undermine the mandate and “deal a massive blow to rural America.”
Copyright 2018, Bloomberg