Corn Commentary

Don’t Mess with the RFS

Now that it appears the ethanol tax incentive and tariff will be going away for good at the end of this year, opponents have officially started the war against the Renewable Fuels Standard (RFS2), which requires an increasing amount of renewable fuels to replace petroleum in our nation’s transportation fuel.

Legislation called the Renewable Fuel Flexibility Act has been introduced in the House that would change the requirement for ethanol in the motor fuel supply under the RFS2 whenever corn stocks are tight. While this might seem like a good idea to some on the surface, it’s really a very bad idea.

The intent of bill sponsors Bob Goodlatte (R-VA) and Jim Costa (D-CA) is to give relief to livestock producers, dairymen and consumers. Here’s what Rep. Costa said introducing the bill:

“The Renewable Fuel Standard has been incredibly successful in replacing a portion of the oil we import with home-grown energy, and I continue to support RFS. While ethanol is not the only factor I am convinced it is a factor in the high prices farmers pay for feed and consumers pay for food.”

So, even though the RFS is helping reduce our dependence on foreign oil, and even though it is only one factor of many in the price that livestock producers pay for feed, these lawmakers want to tamper with a standard that basically has been doing what it was intended to do since it was first implemented in 2005 and expanded in 2007.

All of the ethanol organizations and a number of farm organizations - including American Farm Bureau and National Farmers Union, both of which have livestock producers as members - are opposed to changing the RFS2 for a number of reasons. First and foremost is that the corn stocks-to-use ratio can vary tremendously from month to month. The Goodlatte-Costa bill would determine the amount of change in the RFS based on the stocks at the time EPA sets the RFS standards for the following year. The problem with that is the stocks-to-use ratio is just an estimate and has varied by 4-8% between USDA’s first prediction to the final for the last three years. Geoff Cooper of RFA has an excellent analysis of this on the E-xchange Blog where he has the following table:

The Goodlatte-Costa bill would require a reduction in the RFS when the stocks-to-use ratio drops below 10 percent, up to a 50 percent reduction if the ratio falls below 5 percent. Under the estimates for the 2010-11 year, if the RFS was set at the first estimate, there would have been no change. If it were set later, at the 5% low estimate, then the RFS would have been cut by at least 25%.

Another reason not to mess with the RFS is that it would likely result in increased gas prices. A study done earlier this year by economists at the University of Wisconsin and Iowa State University found that the increase in ethanol use between 2000 and 2010 reduced gasoline prices by an average of $0.25 per gallon, or 16 percent. In addition, the report determined if ethanol production ended, gas prices would increase, depending on a range of conditions, from 41% to 92%.

So, if the Renewable Fuel Flexibility Act were passed and the RFS2 were changed in the coming year to require 25-50% less ethanol in the fuel supply, gas prices would probably go up as a result. And since energy costs are one of those other factors in the price of food and feed (actually the biggest factor, but whatever) the result would be …. higher food and feed costs!

Bottom line, the RFS2 is doing what it was intended to do by cutting our dependence on foreign sources of petroleum - don’t mess with it now that we are actually making progress.