With the drought conditions continuing throughout much of the country, we already know that this year's corn yield will be down, potentially resulting in price increases for animal feed and consumer food products.
Ethanol opponents are already fingering the industry as one of the contributors to these expected price increases. In fact, they're in the process of trying to convince the Environmental Protection Agency (EPA) to waive the existing Renewable Fuel Standard (RFS) as a means to keep the cost of animal feed down for livestock producers.
This mindset is absolutely wrong. The ethanol industry should not be held responsible for the consequences of this year's unusual weather patterns. In fact, the RFS already addresses this issue.
A bipartisan mechanism included in the December 2007 Energy Independence and Security Act provides a safety net for ethanol producers and blenders in years where market conditions are not advantageous. The ethanol industry has slowed production from a peak of 14.6 billion gallons annually to the current 12.3 billion gallon operating rate, showing that the system is working.
All ethanol produced in the country is assigned a Renewable Identification Number (RIN). These numbers are, on a very practical level, an accounting mechanism. They ensure that ethanol blenders are implementing the mandated amount of biofuels into our nation's fuel supply, and they allow for the tracking of every gallon of ethanol from producer to blenders and even fuel exporters.
Producers assign the number at production, which is then reported to the EPA. Through the entire process, every time ownership of ethanol changes, the number is also transferred with it. Eventually, once the ethanol is blended into gasoline, the number is turned into the EPA to prove compliance.
For 2012, the EPA is requiring that renewable fuels account for 9.23 percent or 15.2 billion gallons of the fuel produced in the United States this year. This is in keeping with the mandates set forth in the Renewable Fuel Standard (RFS2). That means that every gallon of those 15.2 billion gallons has its own, unique 38-character number.
During the previous few years, the ethanol industry has produced more ethanol than what is mandated in RFS2, resulting in the accumulation of excess RINs. This situation is not only acceptable, but was anticipated within the RFS2.
Blenders are able to hold up to 20 percent of the current year's mandate level. These RINs can be banked for future use or sold. This mechanism is essentially a safety net, and it allows blenders to shift that portion of the mandate compliance over a larger period of time.
Holders of RINs have developed a swap market, and RINs can be sold from one blender to another. The price of an individual RIN fluctuates, depending on market demand within the industry. This is perfectly logical and legal. Blenders can turn in RINs from periods when production exceeded the mandate in lieu of actually blending more fuel.
Like any market, RINs are a commodity that becomes more valuable when blending returns become more unfavorable, such as what is happening this year. Because yields will be reduced, corn will be more expensive.
Based on weather factors, yields, and demand for corn, the gallons of ethanol produced is likely to continue its trend downward, prompting blenders to use their banked RINs to meet the RFS2 requirement this year.
That means that while there will be factors affecting the cost of food in 2012 and well into 2013, ethanol production is not among those factors. In fact, the ethanol industry has been watching this situation very closely to avoid any increase in fuel costs for American consumers as we work through the aftereffects of the unusual growing season this year.