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Ethanol Study Shows Need To Reform RFS Mandate

Ethanol Study Shows Need To Reform RFS Mandate
An inflexible Renewable Fuels Standard (RFS) has led to volatility in corn prices and a smaller livestock industry, but hasn’t reduced America’s dependence on foreign oil, study shows.

Noting that the chances for harvesting a bumper corn crop diminish with each passing day, Rep. Bob Goodlatte (R-VA) took aim at an issue that is causing growing concern not just in livestock circles, but with consumers as well.

During a briefing for congressional staffers this week, Goodlatte said that news reports have begun to raise the specter that a reduced corn crop will hit consumers’ pocketbooks hard by driving up food prices. “Unfortunately, government policies are only exacerbating this dire situation. Now more than ever, it is important for us all to have a serious conversation about the federal government’s role in supporting ethanol.”

According to several studies, Goodlatte’s concern about the food vs. fuel debate are well-founded. During this week’s briefing, Tom Elam, president of FarmEcon, LLC, Carmel, IN, released the results of his study on the effects off the RFS on fuel and food prices.

According to Elam’s study:

  • Current ethanol policy has increased and destabilized corn and related commodity prices to the detriment of both food and fuel producers. Corn price volatility has more than doubled since 2007.
  • Following the late 2007 increase in the RFS, food price inflation relative to all other goods and services accelerated sharply to twice its 2005-2007 rate.
  • Post-2007 higher rates of food price inflation are associated with sharp increases in corn, soybean and wheat prices.
  • On an energy-equivalent basis, ethanol has never been priced competitively with gasoline.
  • Ethanol production costs and prices have ruled out U.S. ethanol use at levels higher than E 10. As a result, the U.S. exported 1.2 billion gals. of ethanol in 2011.
  • Due to its higher energy cost and negative effect on fuel mileage, ethanol adds to the overall cost of motor fuels. In 2011, the higher cost of ethanol energy compared with gasoline added approximately $14.5 billion, or about 10¢/gal., to the cost of U.S. gasoline consumption.

Using four different measures of gasoline prices and oil refiner margins, from 2000 through 2011, there was no statistically significant effect of increase ethanol production on gasoline prices or oil refiner margins.

Noting that his conclusions regarding ethanol’s effects on gasoline were very similar to a study conducted by the Massachusetts Institute of Technology and the University of California-Davis, Elam told the staffers that U.S. oil refiners are refining as much or more motor fuel now than they were in 2007.

Thus, blending ethanol into the gasoline supply has not displaced any foreign oil imports. “Basically, all ethanol has done is displace gasoline from the domestic market and moved that gasoline over to the export market,” Elam says.

Ethanol industry reacts

The ethanol industry reacted sharply to Elam’s report.” While farmers across the country are dealing with a severe drought, the livestock lobby is spreading misinformation and taking advantage of this crisis by playing on people’s fears during a time of economic turmoil,” according to Tom Buis, CEO of Growth Energy. “This is nothing more than an orchestrated attempt to place blame on American ethanol producers for rising food prices.”

According to Garry Niemeyer, president of the National Corn Growers Association, “When it comes to the Renewable fuel standard for ethanol and other biofuels, now is not the time for changes. It’s working. The RFS is revitalizing rural America, reducing our dependence on foreign oil and reducing the cost of gasoline. Making changes to the RFS now would only ensure that consumers suffer due to significantly higher fuel prices.”

Drought causes need for reform

With the potential of a devastating drought, and noting that last year was the first year ever that ethanol production used more corn than livestock and poultry production, Goodlatte called on EPA Administrator Lisa Jackson to reduce the RFS mandate for this year.

“As we confront the reality of tightening corn supplies, there are real concerns about having enough corn supplies to satisfy the needs of the RFS and the needs of our food producers, We should not be in a position where we are choosing between fuel and food,” he says.

Elam agrees. He has heard early yield estimates as low as 114 bu./acre  from people scouting drought-devastated corn fields. “That’s an unmitigated disaster if it happens,” he says. “We would have to make some very, very, very difficult choices about how we’re going to use these crops.”

To read the full report, click here

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