HR 1346, FAPRI’s View, & My Thoughts

My alma mater University of Missouri’s Food and Ag Policy Research Institute (FAPRI) released “Potential Impacts of Proposed E15 Expansion and SRE Reallocation Provisions of HR 1346” this week. 

Its worth a read.

It discusses the impact of bill HR 1346 that recently passed the house, should it become law.  Big headline is this bill gets E15 approved nationwide, year around.  But it comes with  tradeoffs concerning Small Refinery Exemptions (SREs) to the annual renewable mandate (RVO).

TLDR of their assessment of the impact is:

1. Ethanol/corn demand up, biobased diesel/bean oil demand down.
2. Gas prices up 1-3 cents, diesel down 30-56 cents over 10 years.
3. RIN and compliance costs go down for refiners.
4. Corn prices up 3-14 cents, soybeans down 17-44 cents over 10 years.
5. Small switch from soybean to corn acres (.3-1.5 mil acres) over 10 years.

I appreciate their approach. 

They explicitly acknowledge that assumptions made are impactful to the outputs.  And I agree, there are a lot of unknowable things concerning this bill’s impact.  Some of the hot takes I saw on this paper clearly did not read that acknowledgement.

That said, I have some thoughts about the bill and E15 generally.  Here’s a few.  Enjoy.

First, E15 implementation is accelerating, right now, without HR 1346. 

Gasoline is $3.50, ethanol is $2.00 and RINs are $2.00.  FAPRI’s model assumes .25% per year blend rate increase.  I expect faster, much faster.  I’m seeing it anecdotally in my own travels without the passage of this legislation.  Large chains are making the switch in new places, converting E10 pumps to E15.

Let’s look at the last time blending ramped quickly.

Post RFS passage, from 2006 -2010 ethanol blend rates increased an average of 1.26% per year, running headlong into the blend wall in 2010 at 9.13%.

In that time period gas prices spiked from sub $1/gallon to over $3.50/gallon (futures equivalent) in 2007, then crashed due to the Great Financial Crisis. 

We also see that US gasoline demand and imports were both spiking, amidst post 9/11 conflicts in the oil exporting regions of the world.

And the Governor of California drove a Hummer.

Ok, that last one wasn’t too relevant, but still a heckuva time capsule.

Here’s my point, this time period experienced rapid ethanol growth because of a confluence of factors.  RFS implementation of course mattered, and it set the floor for minimum usage.  MTBE phase out in 2006 also helped.  But economics and geopolitics mattered too.  Gas was both expensive and imported.  It made sense, and the market responded accordingly. 

Today has a lot of parallels. 

Energy prices are high.

Conflicts in the Middle East and Russia are running hot.

New policies are improving corn ethanol economics (45Z and higher RVOs). 

And now comes this potential E15 legislation.

To me, it all adds up to higher inclusion, faster.

Second, D6 RINs’ day in the sun will soon be over. 

FAPRI tables show a D6 RIN price reduction of up to $1.04/gallon in their scenario analysis.  I agree, and I think it may happen within 2 years.

Current RVOs mandate 15 bil gallons of conventional biofuel (ethanol) annually.  Its easy to conflate this 15 bil gallon mandate with E15.  They are NOT THE SAME. 

15 bil gallons is:

1. Closer to an 11% blend rate than 15%.
2. Less than current annual US ethanol production. 

The US produces ~16 bil gallons annually, with exports absorbing production above the ~14 bil gallon domestic usage.

We could hit 15 bil gallons annualized blend rate within 12 months…and still have LOTS of room for expansion with year round E15.

What happens when US ethanol consumption exceeds the statutory mandate volume of 15 bil gallons?

D6 RINs don’t have any value, eventually.

The devil is in the details:  20% annual compliance rollovers, prior year(s) compliance delays, carryover RIN balances, etc all play in to when D6 prices crash.

But to me the writing is on the wall, D6 RINs will eventually break, hard.

This will create all kinds of knock on effects, some of which the authors at FAPRI mentioned in their paper.

Finally, after E15 passes, maybe corn and soy industry groups can start rowing together again.

It’s been a weird few years in Ag Policy.  Corn farmers ARE soybean farmers.  Same people.  But somehow the corn and soybean lobby have recently acted more like the Hatfield and McCoys.

Corn and soybeans are competing in many relatively recent ways in the marketplace, specifically in the parts of the markets where policy matters most. 

Here’s a few examples:

• The D6 RIN shortfall has been here for some time, and soy groups want to hold on to that mandated demand…which puts them at odds with E15 rollout.

• Sustainable Aviation Fuel (SAF) can be made from either corn ethanol or soybean oil.  This sets the stage for lots of conflict, including at state levels where some are lobbying for SAF subsidies that explicitly exclude access by the other side.

• 45Z tax credits are in many ways a reincarnation of the constantly expiring biodiesel blenders tax credit.  But because of 45Z’s new structure ethanol now stands to be a big winner.  Meanwhile soy based fuels have seen their $1/gallon credit reduced substantially.

• Small Refinery Exemptions (SRE) reallocations are almost exclusively a soy problem.  Corn ethanol demand does not go down when SREs are not reallocated.  Soybean oil demand does.  E15 passage depends on making a deal in DC with the energy lobby.  Given what’s at stake for corn, it’s perfectly logical for them to side with the energy lobby and negotiate away SRE reallocations to get E15 in HR 1346. 

So, its been weird, to say the least.

But once E15 gets passed, corn and soy will immediately be more aligned.

Think about it, as soon as E15 passes and ethanol consumption increases, a few things begin happening:

• RFS compliance costs go down.  D6 RINs will break, significantly reducing compliance costs for many refiners.  This is a political win for everyone and will make efforts to increase the RVOs in subsequent years more palatable politically.

• Ethanol will want a higher mandate to force adoption up to the E15 blend max.  With capacity to blend, we will be back to the good ole days of ethanol pushing hard for a bigger share of the fuel tank at the expense of petroleum.  And soy groups will be aligned here.  A bigger conventional mandate gives soybean oil a chance to a) supply that mandate if ethanol supply slows and b) push for a bigger mandate for their own products.

• SAF becomes less existential for ethanol’s near term future.  E15 provides several years of good growth for the ethanol industry.  I wouldn’t be surprised to see ethanol lose a little focus on the SAF prize when they have such an easy path to walk with domestic auto demand.  Maybe this is a pipe dream, but I could see an improved working relationship around SAF once both sides have a little more certainty about their existence.

I like the idea of a more unified Ag voice, and I think getting E15 passed will do that. So let’s get this done and move forward.

Anyway, this thing is getting long, I’m going to leave it here. 

In the meantime go give FAPRI’s paper a read and let me know what you think.