fb - voice of agriculture
Focus on Agriculture

December 11, 2013

Move the RFS Forward, not Backward

By Matthew Erickson

The renewable fuels standard has been front and center in Washington since the Environmental Protection Agency last month proposed to roll back total 2014 renewable fuel blending requirements to 15.52 billion gallons, a whopping 1 billion gallons less than 2013 totals and 2.63 billion gallons below the mandate set in the Renewable Fuel Standard 2 law. This decision strikes a blow to conventional ethanol production, as well as dampens the prospects for advanced biofuels.

Renewable fuels play a significant role in American agriculture, but have certainly not been the only driver of demand for agricultural products. Since the RFS2 was put into place in 2007, agricultural exports have increased 57 percent, total livestock output has increased 31 percent and total crop output has increased 44 percent.

However, the effect of the proposed rule will affect corn prices. Since the leak of the proposed rule in October, corn futures have seen a 5-percent reduction.

Net farm incomes are expected to hit the highest level in four decades for 2013, driven by a bumper crop of corn and soybeans that followed two years of drought. Even with corn and soybean prices where they are now, farmers were able to lock in higher prices earlier this year through contracts, a situation that is not likely to repeat in the spring of 2014.

Corn prices dropping the way they are now raises the question: Will 2014 be the year when production costs blow past decreasing commodity prices?

Further, if finalized, EPA’s proposed rule would essentially shed more than 500 million bushels from corn demand making ethanol exports the key ingredient to make up for lost demand in the domestic ethanol industry. In fact, estimates range farm prices for corn between $3.95 and $4.15/bushel for the 2014/15 crop year, making the likelihood of the price farmers receive for their corn and soybeans lower than their cost of production.

In addition, this significant reduction, should EPA go final with its proposed rule, would slow or halt investments in the infrastructure needed to distribute and dispense larger volumes of ethanol. This decision from EPA will stall new investments in cellulosic biofuels and introduce detrimental ambiguity in a market that is still developing.

According to EPA, more than $2.4 billion was invested in advanced biofuel companies by venture capitalists alone from 2007 through the second quarter of 2011. This decision from EPA sends a negative signal that threatens to stall investments that foster good-paying jobs in rural America.

While the RFS is important to agriculture, it’s just as important to America’s overall economy and energy independence. Since the RFS2 has been in place, the U.S. has seen its crude oil imports decrease from about 60 percent of total oil use to around 40 percent.

However, the U.S. still has a ways to go from being completely energy-independent even if oil imports are dropping. We are still affected by swings in oil prices, which are set on world markets.

Price spikes in crude oil can lead to large global economic consequences. During the Arab Oil Embargo in 1973-1974, global crude oil expenses represented 4.5 percent of the world’s gross domestic product. Since 2011, every time this figure has increased over 4.5 percent, a world recession has occurred. From 1973-74 during the Arab Oil Embargo, annual world oil prices experienced a price shock of 252 percent, 125 percent from the Iran Revolution in 1978-79 and 34 percent from the 2007-2008 recession.

Matthew Erickson is an economist at the American Farm Bureau Federation.