Texas Governor Requests EPA Cut Renewable Fuel Standard Requirements in Half Due to Grain Costs
26 April 2008
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| An analysis by Texas A&M concluded that a waiver in the RFS would likely have only a small impact on the price of corn. (See below.) Click to enlarge. |
Texas Governor Rick Perry has requested that the US Environmental Protection Agency grant a national 50% waiver from the federal renewable fuel standard (RFS) mandate for ethanol produced from grain because of rising grain costs. The RFS currently requires 9.0 billion gallons of renewable fuel in 2008.
In his letter, the Governor states that the “artificial demand for grain-derived ethanol is devastating the livestock industry in Texas and needlessly creating a negative impact on our state’s otherwise strong economy while driving up food prices around the world.”
While many other factors affect the price of corn, I need only to look at skyrocketing grocery prices to know that granting a waiver of RFS levels is the right thing to do. As I noted to fellow governors at a recent Republican Governors Association meeting, “If you think it’s bad for foreign countries to control our fuel, image what it would be like if they control our food supplies.”
—Letter to EPA Administrator Stephen Johnson
In 2007, 25% of the US corn crop was diverted to produce ethanol, according to the United States Department of Agriculture, which projects that 30 to 35% will be diverted in 2008.
The Texas Cattle Feeders Association immediately supported the Governor’s request, stating that it recognized that the federal government’s ethanol policy is not the only thing driving up grain prices, but “it is certainly a major factor.”
One need only to look at the price increases for corn since the federal government began its big push for ethanol to see the correlation: More corn being diverted to ethanol has meant much higher prices for livestock feed.
—Texas Cattle Feeders Association
The Renewable Fuels Association (RFA) shot back, saying that while the reduction would not appreciably reduce grain prices for livestock producers and food processors in Texas, it would increase gasoline and diesel prices even more by eliminating 4.5 billion gallons of fuel from the marketplace. “While this may benefit Texas oil companies, it will certainly hurt consumers in Texas and the rest of the country,” the RFA said.
Economists at the University of Wisconsin-Madison recently published an analysis of the impact of ethanol production on the price of corn in the US. After considering how supply and demand factors, including feed, seed and exports, affected corn prices, T. Randall Fortenbery and Hwanil Park concluded that while rising ethanol production has a “significant impact” on increased corn prices, it is not the sole cause of the higher prices.
...a 1% increase in ethanol production causes a 0.16% increase in the corn price in the short run, ceteris paribus...Since ethanol production capacity essentially doubled between the first two quarters of the last and current marketing years, the model results above suggest that ethanol’s contribution to the price rise was about 41 cents per bushel, ceteris paribus. This would have resulted in an average 2007/2008 first quarter price of $2.95 per bushel had nothing else changed. While this is a significant year over year increase, it is substantially less than the actual price appreciation between the start of 2006/2007 and the start of the 2007/2008 marketing year. As a result, while ethanol production has had a significant and positive impact on corn price, it does not fully explain price level changes in the 2006/2007 marketing year.
...[corn prices in] first quarter 2007/2008 were well above what would be projected, and cannot be explained based simply on ethanol production and associated corn use (as has been the practice in the popular press). This suggests that there may be an outside factor influencing prices beyond those captured in the supply/demand framework estimated here.
Researching more carefully the impact on price discovery resulting from a large increase in the amount of risk capital coming from the speculative side of a market seems justified, and this is the focus of current work. In short, there is no empirical evidence to date to justify a suggestion that prices have exceeded their “fundamental” levels as a result of market structure (i.e., growth in the speculative component), but is also clear that attempting to explain current price levels simply as a function of ethanol production is a bit naïve and inaccurate.
—Fortenbery and Park
Separate research by economists Agricultural and Food Policy Center at Texas A&M University concluded that the underlying force driving changes in the agricultural industry, along with the economy as a whole, is overall higher energy costs—e.g., $100+ per barrel oil.
Their report, “The Effects of Ethanol on Texas Food and Feed” also concludes that relaxing the RFS would not result in significantly lower corn prices, due to the ethanol infrastructure already in place and the generally positive economics for the industry.
The ethanol industry has grown in excess of the RFS, indicating that relaxing the standard would not cause a contraction in the industry.
—“The Effects of Ethanol on Texas Food and Feed”
The researchers explored three scenarios (full RFS, one-half waiver and one-quarter waiver) and concluded that corn prices would be fairly steady near current levels under all scenarios.
Expected prices across scenarios gradually diverge, with the one-quarter RFS waiver price falling about $0.30 per bushel below the full RFS price a few years hence, and the one-half RFS waiver price falling about $0.50 to $0.60 per bushel below the full RFS expected price.
Other findings of the Texas report include:
Speculative fund activities in futures markets have led to more money in the markets and more volatility. Increased price volatility has encouraged wider trading limits. The end result has been the loss of the ability to use futures markets for price risk management due to the inability to finance margin requirements.
The potential exists for even higher corn prices based on historical yield variability. Fewer corn acres planted in 2008 leave production susceptible to weather risks. Small yield reductions will result in even higher prices.
The livestock industry has borne the costs of higher corn prices. The structure of the industry has made it unable to pass costs on, either up or down the supply chain.
The livestock industry is in the middle of this transition, and prices don’t yet reflect the impact of higher costs.
The net balance to the Texas agricultural economy is negative. While corn and grain sorghum producers benefit from high prices, the livestock industry faces increasing costs. Because the livestock industry is bigger than the crop industry, the net balance is negative.
Resources
T. Randall Fortenbery and Hwanil Park (2008) The Effect of Ethanol Production on the US National Corn Price
David P. Anderson et. al. (2008) The Effects of Ethanol on Texas Food and Feed
Rick should get busy promoting cellulose ethanol and they might grant the waiver.
Posted by: SJC | 26 April 2008 at 09:05 AM
Eventually, more and more people will realize that grain/corn ethanol does not make sense. The world cannot have (endure) a gas guzzler vs food competition. Fertile land most be used to produce food.
Cellulosic liquid fuel, if managed properly (without using good food production land) and coupled with the accellerated introduction of improved Hybrids, PHEVs and BEVs, would be a more sustainable solution.
The world should realize that before corn ethanol production has gone too far.
USA should wake up and be the world leader in non-foodstock biofuel production, improved batteries mass production, improved Hybrids of all sizes, PHEVs and BEVs and cleaner electric energy production.
USA and many other countries like Canada and Australia should learn to live (well) with 60% less energy per capita, like many other countries like Japan, Germany and most European countries have learnt to do.
Posted by: Harvey D | 26 April 2008 at 10:21 AM
I agree. The U.S. is a behind the curve due to GWB and the rest. We could have continued with the PNGV program and actually had lots of U.S. hybrids by 2005. The invisible hand smacked us in the head again and here we are, having to start from square one and play catch up once again.
Posted by: SJC | 26 April 2008 at 10:42 AM
Remind me.
What is,
"non-food" phosporous
"non-food" water
"non-food" topsoil
"non-food" ammonia
Do you actually think it matters if the crop is "non-food", if it dramatically increases the scarcity/price/speculation of those basic components to food production?
And rather than a "non-food" label.
Why not say what it really is?
It's either decreased inputs, or increased outputs?
Chances are increased outputs.
And if it's increased outputs, considering Jevon's paradox;
What makes you think that will reduce the price/scarcity of inputs?
It won't. Infact it will make the price/scarcity of inputs go up, as they become consumed at a higher rate to feed the growth in the biofuels sector.
_
Thats like arguing that since the 1980's our automotive policy.
We've been focusing on increasing the output of the engines, rather than decreasing the input.
And look where we are now.
Posted by: GreyFlcn | 26 April 2008 at 10:51 AM
PNGV was a late 80s early 90s program. It was screwed up by the likes of Amory Lovins and other pseudo-scientist self-appointed "authorities" who it turns out have never really studied any science.
They produced ridiculous ideas. For example, they recommended saving a few pounds of weight by incorporating very expensive composites that are non-sustainable and non recyclable. As well as astronomically expensive. Other help from know-nothings produced million dollar vehicles as a result that were total boondoggles. Just what you would expect from a bureaucratic committee of well connected friend of politicians.
People, that had no need, to concern themselves with producing a vehicle that would sell for a price the mass market could afford, and could be mass manufactured.
In any case, the BEV and the PHEV when rationalized, by appropriate battery technology, is the route to go; and PNGV was superceded by a a government industry consortia to develop an appropriate battery technology.
Yes, Toyota took the PGNV and discarded all the esoterica and produced a vehicle with 30% greater mileage. They did it using a lot of vehicle components that they had on hand. Small IC engines and componentry suitable to that size vehicle. Sorry, that HEV is an improvement, but does not go anywhere near far enough to solve the problem. Nor does it remove Oil as a supply problem, nor does it reduce CO2 enough as you seem to want for whatever reason. There were a lot of other automakers in the world, with smallcar comnentry. None of which that ever implemented HEV, either.
Only substituting electricity for hydrocarbons as a motive force for Transport is the solution.
Thanks to Mr. Bush, the US ABC took Li-Ion froma lab curiosity to a product. Recall at the time of PNGV, the "perfected" lead-acid battery was what was on the drawing board. Later supplemented by NiMh technology. Neither of which is good enough to provide the size,weight power energy ratios for an electric fleets of autos, not golf carts.
Posted by: | 26 April 2008 at 12:31 PM
The Governor is full of manure. $120/br oil and the early affects of Global Warming are the what's drive grain prices.
Posted by: DS | 26 April 2008 at 12:54 PM
Unidentified:
Please tell us exactly what Mr. W. did for the Li-On batteries?
Posted by: Harvey D | 26 April 2008 at 12:56 PM
The opinion of the Texan governor smells more like political spin than any sincere compassion for the Texan livestock industry. The biggest industry in Texas is oil by far and they are the one that may wish that the US ethanol production was going down since it would increase the price of oil. According to Merrill Lynch analyst Francisco Blanch the world oil prices would be 15% higher if it was not for the current global supply of ethanol. The global ethanol production is increasing rapidly and that is increasingly helping to prevent an even more serious rise in oil prices. To prevent ethanol from increasing further in order to boost oil prices is a more probable reason for the governor’s opinion that obviously must be influenced by the Texan oil industry. I do not blame them. We all do what we can to make more money for ourselves.
Of cause a Texan governor can’t go around saying that he wants ethanol to go down so that Texas can make more money on oil and therefore this idea about helping the livestock industry is the one that is argued. It is a ridiculous idea because the livestock industry will soon enough pass on the extra feeding cost to the consumers. The problem with the livestock industry is that nobody wants to be the first to increase their price of fear that they will lose market share. Once that fear is less than the fear of losing money you will see a solution. One could argue that it is bad for US consumers that meat prices go up. Well it is certainly not bad for their health if less meat is consumed and the US economy will benefit from increased meat prices since it is a large net exporter of meat. Finally, it is very debatable whether a reduction of US grain ethanol will reduce the price of grain. That price is going up mostly because of the rapidly increasing demand from China and India because they what to eat more meat. This increase in demand is still much larger than the increase in demand for grain to ethanol. However, we are getting to the point where grain for ethanol production can have a measurable effect on grain prices. The current US regulation cap grain ethanol at 15 billion gallons and that is below the level where it will have a serious effect on grain prices. 15 billion gallons of grain ethanol is 125 million tons or only 5% of the global grain production. How can that be important for the price of corn/grain?
It would be fair to mention that the Texan governor is actually also responsible for the fastest expansion of renewable energy from wind power in the US and probable in any region in the world. They do it to make money not to be green but they do it and that is what matters. We don’t need to agree about everything in order to respect each other so I respect the Texan governor very much all in all. He may even not like what he says but he may do it because a politician needs to please his constituency in order to be in business. The spin is actually rather clever because he pleases both oil as well as the livestock industry and it is not that obvious that it is a spin because a lot of people will buy that increasing food prices are caused by grain ethanol for gas-guzzling SUVs and trucks. It is less abstract than increased grain demand caused by increasingly meat eating Chinese.
Posted by: Henrik | 26 April 2008 at 01:06 PM
exactly, nothing but spin. Follow the money, it always leads to the real answers. Atleast some people can think for themselves, good job!
Posted by: reed | 26 April 2008 at 01:26 PM
I have little sympathy for the cattle folks, beef should not be fed grain in the first place, the cattle don't digest it well and the meat is less healthy. It would be much better for cattle producers to switch back to grass as feed, their yield wouldn't be as high, but the product would be better for us.
Posted by: pstoller78 | 26 April 2008 at 01:58 PM
“It would be fair to mention that the Texan governor is actually also responsible for the fastest expansion of renewable energy from wind power in the US and probable in any region in the world.”
Henrik, you mean Governor Bush. He was governor when the innovative Texas RPS was first established. Now that the economics of wind generation have been established, the US is erecting turbines as fast as they can be built as long as the federal PTC.
It is also about time that American get paid a decent return for their crops.
Posted by: Kit P | 26 April 2008 at 02:05 PM
PStoller78, you hit the nail on the head. But I would take it one step further. Corn finds it way into all sorts of other foods where it does not belong, ie high fructose corn syrup. If we encouraged people to eat a more diverse diet, and less corn, we'd be healthier and less concerned about corn being diverted to ethanol.
I'm not defending corn-ethanol, I think it is a lousy idea, but I also do not believe it is singlehandedly responsible for so many of this planet's problems.
Contraception would also help. Fewer people means both less fuel and less food would be needed.
Posted by: Peter | 26 April 2008 at 02:14 PM
High fructose corn syrup became a major component of our diet coincidently with the rise in Autism in the USA.
Posted by: Lucas | 26 April 2008 at 02:39 PM
“It would be fair to mention that the Texan governor is actually also responsible for the fastest expansion of renewable energy from wind power in the US and probable in any region in the world.”
Henrik, you mean Governor Bush. He was governor when the innovative Texas RPS was first established. Now that the economics of wind generation have been established, the US is erecting turbines as fast as they can be built as long as the federal PTC.
It is also about time that American get paid a decent return for their crops.
Posted by: Kit P | 26 April 2008 at 03:37 PM
There is a standard conservative trick here. Conservatives will always argue that the free market should be left alone because it allocates resources perfectly. But they will refute this when it is not in their favor.
If we go by the free market, we should let it decide whether an acre of land is used for fuel production or food production. If you can make more money selling the fuel rather than the food, then according to conservative dogma you have done the most good for society since you let the market allocate things in the best way. If the fuel we get from that acre is more exciting to us than that corn, we should produce the fuel. And if the price of goes up too much, the market will regulate itself. We will choose the corn for the next acre instead of the fuel.
But here is Rick Perry saying that planting land for fuel drives food prices up. Of course it does, but only because we really ,really need fuel. That's why we planted it. If we didn't plant it, then out need for that fuel would drive up the price of the other available fuel, which is oil, up anyway.
Posted by: Jamie | 26 April 2008 at 03:53 PM
See what happens when the President and Congress listen and are guided by Lobbyist. How about approaching problems based of foresight and scientific study instead of "who can help me get elected?"
Our current government keeps stepping in sh1t and spreading it all over the earth. There are certain political actions you don't perform: one is to spread hunger through out the world. Hunger fosters revolutions; I will be happy when the "c" student and his dirty tricks political adviser Karl Rove leave the white house.
Posted by: Lad | 26 April 2008 at 03:53 PM
"In 2007, 25% of the US corn crop was diverted to produce ethanol, according to the United States Department of Agriculture, which projects that 30 to 35% will be diverted in 2008."
Unreal.
Anyone claiming that diverting over a third of corn production to making fuel doesn't impact global food prices is lying to your face.
Not counting the water, energy, and fertilizer consumed.
Drop *all* ethanol subsidies immediately, including the import tariff and see if it "positive" economically to make E85.
Ethanol makes a great oxygenator (replacing MTBE), but a lousy fuel.
Posted by: Bill | 26 April 2008 at 04:48 PM
I would agree that using corn for ethanol has an effect on world food prices. To what extent is not clear. If oil has quadrupled in price, does that have and effect? If Asia is eating more grains and meat, does that have an effect? Does corruption in poor countries have an effect? The list goes on and it may not be accurate to blame it on any one thing. Is it lying or deception to blame it on just one thing?
Posted by: SJC | 26 April 2008 at 05:11 PM
To be fair, I don't think it's necessarily that corn ethanol is causing the cost rise because the corn used to make it is technically inedible. It's because that farm land is devoted to make that inedible corn and let's face facts: We use corn based products in processed foods via high fructose corn syrup (HFCS). If you were to take that out of say the processed foods we eat, then it wouldn't be causing these rises in food cost.
Posted by: Gerald Shields | 26 April 2008 at 05:37 PM
Also, cellulosic ethanol is not a alternative either. When it's produced from feedstock like switchgrass and sawgrass, the nutrients required to grow the cellulose are removed and cannot decay and replenish the soil. The soil is of poorer quality, and unsustainable soil erosion occurs.
Posted by: Gerald Shields | 26 April 2008 at 05:42 PM
Cellulose ethanol is most certainly an alternative. Corn stalks that are just plowed under can be used. The farmer has to watch that they do not plow too much under so they use a lot for animal fodder. Corn cobs are just waste now. They have been trying to find uses for both excess stalks and cobs and now they have a good use for them. Not only a good use but one that can make lots of money for them and perhaps one day offset the subsidies that they receive.
Switch grass is mowed and only replanted every decade. There is very little that goes back into the soil except the deep roots and that does not change. If you can leave the root system in place, there is plenty for the soil to use. No one is going to dig out the roots for food nor fuel. The same is true for corn plants. You use the stalks and cobs, but the plant stump and roots remain to be tilled back in.
Posted by: SJC | 26 April 2008 at 05:56 PM
"High fructose corn syrup became a major component of our diet coincidently with the rise in Autism in the USA."
Can you make up a reference for this?
"In 2007, 25% of the US corn crop was diverted to produce ethanol, according to the United States Department of Agriculture..."
A great thing about computer simulations is... You get to make stuff up - wholesale.
Posted by: atela | 26 April 2008 at 11:02 PM
My referance is personel observation and acquiring a autistic child from it.
He's now 18. Do the math.
Posted by: Lucas | 27 April 2008 at 12:12 AM
Well, I dunno about autism.
But I certainly have seen things arguing there's a link to HFCS and type II diabetes.
Posted by: GreyFlcn | 27 April 2008 at 01:19 AM
Here is the thing ...
We see the diversion of USA corn into fuel
We see rising grain prices.
Now we ask ourselves if the Chinese have more of a 'right' to eat meat, or if the Africans have more of a 'right' to eat at all, or if the Americans have more of a 'right' to drive huge SUV's ...
There are many ways to achieve sustainability in energy, but fuel from food stocks while people are starving is one of the worst ideas to promote.
My vote? produce Battery Electric Cars, and begin a huge geothermal mega project in Yellowstone *(not the park, the underground heat source is far larger).
Posted by: John Taylor | 27 April 2008 at 02:51 AM