- DTN Headline News
EPA Releases RFS
Friday, May 29, 2015 10:14AM CDT

By Todd Neeley
DTN Staff Reporter

OMAHA (DTN) -- While the proposed Renewable Fuel Standard keeps corn-based ethanol below the statutory 15 billion gallons for 2015 and 2016, the proposal released by EPA Friday would provide a much-needed boost for biodiesel.

In 2014, the rule proposes 13.25 billion gallons of corn-based ethanol -- or what was already blended. That number rises to 13.4 billion in 2015, and to 14 billion gallons in 2016.

Much of the anticipation on the announcement centered on the cellulosic ethanol volumes, as that industry has for months indicated there was a growing move by companies to send future investments overseas with continued doubt about the RFS.

On the cellulosic side, EPA proposes setting those volumes at 33 million gallons for 2014, 106 million gallons for 2015, and 206 million gallons in 2016.

For years, EPA has had to re-adjust the RFS volumes for cellulosic ethanol. The law calls for 1.75 billion gallons in 2014, 3 billion gallons in 2015, and 4.25 billion gallons in 2016. In addition, the EPA proposal calls for a reduction in the overall numbers for 2014-2016.

The total proposed numbers released Friday include 15.93 billion gallons for 2014; 16.3 billion gallons for 2015; and 17.4 billion gallons for 2016.

The biodiesel industry would receive a boost in the latest RFS with the EPA proposing increases in required volumes. The original RFS proposal called for a flat-lining of biomass-based diesel of around 1.28 billion gallons through 2015. The proposed numbers sets biomass-based diesel at 1.63 billion gallons in 2014, 1.7 billion gallons in 2015, 1.8 billion gallons in 2016, and 1.9 billion gallons in 2017.

MARKET EFFECTS

Regarding corn ethanol, the Iowa Corn Growers Association quickly jumped on the EPA announcement, declaring EPA's decision effectively undercuts potential corn-based ethanol usage by 3.75 billion gallons through 2016, effectively reducing corn demand by 1.3 billion bushels in the process.

Though the release of 2014-2016 Renewable Fuel Standard volumes was highly anticipated, chances are the new numbers will have little or no effect on the corn market, according to a DTN markets analyst.

DTN Market Analyst Todd Hultman said even though the market has effectively operated without an RFS in the past 18 months or so, corn use has remained above what the RFS would demand for the crop.

EPA's proposed changes for 2015 and 2016 would amount to 4.8 billion and 5.0 billion bushels of corn use for ethanol respectively. Adding exports to those totals puts the numbers still very close to USDA's estimate of 5.2 billion bushels for both 2014-15 and 2015-16.

USDA's estimate of corn use for ethanol in 2013-2014 was 5.134 billion bushels, 5.2 billion bushels in 2014-15 and was expected to stay at 5.2 billion bushels in 2015-2016.

"It's tricky to compare crop years to calendar years, but the point is that corn use for ethanol has stayed above the old mandate, so far --- even without a new announcement," Hultman said.

That is why, he said, even if EPA made a modest reduction to the mandates, it was unlikely to have much current effect on prices.

"Overall, the corn market can adapt well to mandate changes that come gradually over time," Hultman said, "but the inability of the industry to know what the future of ethanol policy will be adds to long-term anxieties about the future of this industry and the future of corn demand for fuel."

For now, corn will trade mostly on weather and largely ignore the bigger concerns that may lie ahead, he said.

The overall fundamental outlook for corn prices is neutral in 2015 with USDA estimating U.S. ending corn stocks at 1.746 billion bushels, Hultman said, slightly lower than the current season's estimate of 1.851 billion bushels.

"The fact that spring weather has been generally favorable so far and 85% of the corn is already planted is a good start for this year's corn crop, but currently bearish for prices," he said. "I mention all that for context because the main concern for corn prices this year will come from the weather, especially at pollination time."

Ethanol production accounts for 38% of corn use, Hultman said, "so the minimum volumes set in the new Renewable Fuel Standards for 2014-16 will be important, but marginally so for corn prices. Unless there is some drastic surprise, the announcement is not likely to have much impact on corn prices."

In the past 18 months with effectively no RFS, he said, ethanol demand has held up well and exports were up 35% in 2014, a part of the market that does not depend on RFS.

In the first three months of 2015, ethanol exports are up slightly from a year ago and domestic demand has done well, Hultman said, tied to this year's 3.4% year-to-date increase in the pace of gasoline production.

DTN Analyst Rick Kment said it is expected the RFS release will have little effect on the ethanol market since ongoing delays already have been factored in for the past year or so.

"The overall impact of the ethanol market to the release of the updated RFS levels is expected to be light to moderate, given the delays already seen in the market over the last year," he said.

"The focus will continue to be on the expected demand seen for the next couple of years, which may have the greatest impact on ethanol contracts through the second half of 2015."

Although some price adjustments are likely to be seen following the RFS release, Kment said most of the expected effects are likely to have been already factored into the market with current prices backing off of earlier highs, and trading around the $1.50 per gallon level.

"The current availability of corn in order to sustain and maintain ethanol production levels is already keeping prices under pressure, combined with the current discount of 42 cents per gallon that ethanol futures hold to the RBOB gasoline market," he said. "It would not be shocking to see ethanol prices shift moderately around and following the release of the RFS levels, but there the short-term volatility will likely quickly moderate with traders already focusing on abundant supplies of ethanol with production availability remaining strong."

Todd Neeley can be reached at todd.neeley@dtn.com

Follow him on Twitter @toddneeleyDTN

(CC/AG)


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