The EPA Speaks on the 2013 and 2014 RFS

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Consistent with the timing in years past, the Environmental Protection Agency (EPA) set out its final rule for the use of renewable fuels for 2013 and offered some initial commentary with respect to 2014.  Our focus is on the latter; as today’s notice from the EPA represented no material departure from prior notices with respect to 2013 (a reduction in the use requirement for cellulosic biofuel was the change that we saw).

On 2013:

  • “We recognize that the approaching E10 blendwall and the related anticipation of future scarcity of RINs in the context of currently high feedstock prices is the primary driver for these price increases, though other factors and market mechanisms may also contribute to the increase in the price of D6 RINs. As discussed previously in this section, however, we project that there will be sufficient RINs available to obligated parties to satisfy their advanced biofuel and total renewable fuel obligations in 2013 despite the challenge represented by the blendwall.” (emphasis added).
  • This finding by the EPA is wholly consistent with our thinking on the matter as expressed in our prior note.

On 2014:

  • “Given these challenges, EPA anticipates that in the 2014 proposed rule, we will propose adjustments to the 2014 volume requirements, including to both the advanced biofuel and total renewable fuel categories. We expect that in preparing the 2014 proposed rule, we will estimate the available supply of cellulosic and advanced biofuel, assess the E10 blendwall and current infrastructure and market-based limitations to the consumption of ethanol in gasoline-ethanol blends above E10, and then propose to establish volume requirements that are reasonably attainable in light of these considerations and others as appropriate. EPA believes that the statute provides EPA with the authorities and tools needed to make appropriate adjustments in the national volume requirements to address these challenges.”
  • Again, this thinking is wholly consistent with our view (and logic, which is nice to see).

It is uncertain that we will get any more granularity any time soon – anywhere from 1 to 6 months is possible.  For our part, we think that EPA’s “number” for conventional biofuels in 2014 (mostly corn ethanol) will come in below the 14.4 billion gallons mandated by the statute (obviously, based on the above commentary) but above the 13.2 billion gallons mentioned as the maximum amount that could be blended as E10 (see below).  We suspect the EPA wants to continue to force the issue (perhaps gently in ’14) with higher ethanol blends while reflecting the reality of the situation.
 
We believe that a reduction in the demand for corn for use in ethanol because of today’s news can result in a benefit to consumers (lower prices for various food products) as well as a benefit to the many industries that use corn as an input.  Further, we believe that it can negatively impact ethanol profitability as well as fertilizer demand and pricing, to the detriment of both those industries.

We quote the EPA’s rule in greater detail (emphasis is ours):

“A number of obligated parties and other stakeholders have communicated to EPA that while the E10 blendwall may be manageable in 2013, in 2014 compliance is expected to become significantly more difficult. We agree with that assessment. In 2014 the applicable volume of total renewable fuel set forth in the statute rises to 18.15 billion ethanol-equivalent gallons, of which 14.4 bill gal would be non-advanced biofuel comprised primarily of corn-ethanol, and 3.75 bill gal would be advanced biofuel. A significant portion of the fuel available to meet the advanced biofuel requirement would also likely be ethanol, including domestically produced cellulosic and advanced ethanol, along with advanced ethanol imported from Brazil. However, the maximum volume of ethanol that could be consumed as E10 in 2014 is projected to be just 13.2 bill gal.  Given the history of the market and relevant constraints, EPA does not currently foresee a scenario in which the market could consume enough ethanol sold in blends greater than E10, and/or produce sufficient volumes of non-ethanol biofuels (biodiesel, renewable diesel, biogas, etc.), to meet the volumes of total renewable fuel and advanced biofuel stated in the statute.

Given these challenges, EPA anticipates that in the 2014 proposed rule, we will propose adjustments to the 2014 volume requirements, including to both the advanced biofuel and total renewable fuel categories. We expect that in preparing the 2014 proposed rule, we will estimate the available supply of cellulosic and advanced biofuel, assess the E10 blendwall and current infrastructure and market-based limitations to the consumption of ethanol in gasoline-ethanol blends above E10, and then propose to establish volume requirements that are reasonably attainable in light of these considerations and others as appropriate. EPA believes that the statute provides EPA with the authorities and tools needed to make appropriate adjustments in the national volume requirements to address these challenges. We are currently evaluating a variety of options and approaches consistent with our statutory authorities for use in establishing RFS requirements for 2014. We will discuss these options in detail in the forthcoming NPRM for the 2014 standards and expect to utilize the notice and comment process to fully engage the public in consideration of a reasonable path forward that appropriately addresses the blendwall and other constraints.”

We believe that a reduction in the demand for corn for use in ethanol because of this thinking on the part of the EPA could result in a benefit to consumers (lower prices for various food products) as well a benefit to the many industries that use corn as an input.  Further, we believe that it would negatively impact ethanol profitability as well as fertilizer demand and pricing, to the detriment of both those industries.  Within the fertilizer industry, nitrogen is the most critical for corn production and represents about half of the total nutrients consumed in the U.S.  Virtually all of the corn acres planted receives some sort of nitrogen fertilizer.  Of course, that group has seen more than its share of negative news flow over the past 10 days, but we think this news represents a potential further overhang arguing for our “dead money” view of the sector.

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