The Ethanol Blend Wall, Biodiesel Production Capacity, And The RFS...Something Has To Give

We have had a number of posts in in the last year addressing issues associated with U.S. biofuels policy. In particular, we noted in the post found here that the new era of higher crop prices that began in late 2006 could be extended well into the future as a result of the Renewable Fuels Standard (RFS) for advanced biofuels which in all likelihood could only be met with a rapid expansion in biodiesel production. That analysis is revisited here based on additional information, including the mandated RFS volumes of biofuels for 2013 recently released by the U.S. Environmental Protection Agency (EPA). Our focus is on the increasing difficulty of meeting the RFS for both renewable biofuel (domestically produced ethanol) and advanced biofuels in the next 12 to 18 months. This issue is quickly coming to the forefront as the total mandate for biofuels continues to increase sharply--from 16.55 billion gallons this year to 20.5 billion gallons in 2015. Most importantly, the mandates could exceed the capacity to produce and/or blend biofuels by a substantial amount as soon as mid-2014.

We start with the advanced RFS and a potential scenario for meeting those requirements for the next three years (Table 1). The advanced RFS is for 2.75 billion gallons this year, 3.75 billion gallons next year, and 5.5 billion gallons in 2015. The advanced component of the RFS can be met with cellulosic ethanol, biodiesel, imported Brazilian sugar cane-based ethanol, or using accumulated credits (in the form of RINs) generated from previous discretionary blending (several other pathways have been approved but these are not expected to be large contributors to meeting the RFS over the next three years). Our expectation is that cellulosic ethanol will be available in very minimal quantities in the next three years. EPA, for example, has reduced the RFS for cellulosic ethanol in 2013 from one billion gallons to 11 million gallons (14 million gallons of ethanol equivalence). We assume a cellulosic RFS mandate of essentially zero for the three-year period. The RFS for 2013 requires a minimum of 1.28 billion gallons of biodiesel blending. A minimum of one billion gallons is required in each of the next two years, but we assume the current minimum of 1.28 billion will be extended for 2014 and 2015. Each gallon of biodiesel receives 1.5 gallons of credit for meeting the RFS so that production of 1.28 billion gallons counts as 1.92 billion gallons. The difference between the total RFS and 1.92 billion then has to be met with undifferentiated advanced biofuels, in the form of either additional biodiesel or Brazilian ethanol, or by using accumulated credits (in the form of RINs) generated from previous discretionary blending.



An important question is the mix of biofuels that will be used to meet the undifferentiated portion of the RFS. Based on our earlier analysis, the re-instatement of the biodiesel tax credit of $1.00 per gallon makes biodiesel economically more attractive than Brazilian ethanol for meeting the advanced RFS. It could be argued that unless price relationships or tax policy changes, the U.S. will import minimal amounts of Brazilian ethanol over the next three years. Here, we assume annual imports near the 2012 level of 500 million gallons. An analysis of alternative import levels is very straightforward. The remaining undifferentiated RFS is assumed to be met with biodiesel, remembering that each gallon receives 1.5 gallons of RFS credits, or with the current stock of biodiesel (D4) RINs. We assume that the current stock of D4 RINs is completely depleted to meet 330 million gallons (in ethanol equivalents) of the RFS in 2013. Under these assumptions, domestic biodiesel production needed to meet the advanced RFS increases from 1.28 billion gallons this year to 2.17 billion gallons in 2014 and 3.33 billion gallons in 2015.

Next, we consider the RFS for renewable biofuels (domestically produced ethanol) and the implications for U.S. ethanol production and corn demand (Table 2). It should be emphasized that quantities of ethanol included in Table 2 are in terms of 100 percent ethanol, whereas commonly reported ethanol production and trade data include small quantities (currently about two percent) of denaturant. Notice also that the volumes of ethanol imports in Table 2 are the same as the volumes of undifferentiated Brazilian ethanol in Table 1. This reflects the assumption that ethanol imports into the U.S. are driven entirely by the advanced RFS requirements. The (implied) RFS mandate for renewable biofuels is 13.8 billion gallons in 2013, 14.4 billion gallons, in 2014, and 15 billion gallons in 2015. The renewable mandate can be met by blending U.S. produced ethanol, blending advanced biofuels in excess of the advanced RFS, or using accumulated credits (in the form of RINs) generated from previous discretionary blending.

Source: Farmdocdaily.illinois.edu