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RFS Trimmed for Ethanol, Raised for Biodiesel; Industry Reaction Split

In a move federal officials say will help better match up renewable fuel use with production, Environmental Protection Agency (EPA) leaders announced a new set of usage mandates for ethanol and biodiesel as part of the Renewable Fuels Standard (RFS) for the next 2 years.

Essentially, the adjustment pares down the ethanol mandate through the end of 2016, the point at which it will be "back on the statutory timeline," says Janet McCabe, Acting Assistant Administrator for the Office of Air and Radiation.

"These proposed volumes would allow volumes of conventional (non-advanced) renewable fuel of up to 13.25, 13.40, and 14.00 billion gallons to be used to satisfy the total renewable fuel requirements for years 2014, 2015, and 2016, respectively," according to an EPA fact sheet released Friday. "Due to constraints in the fuel market to accommodate increasing volumes of ethanol, along with limits on the availability of non-ethanol renewable fuels, the volume targets specified by Congress in the Clean Air Act for 2014, 2015 and 2016 cannot be achieved. However, EPA recognizes that the statutory volume targets were intended to be ambitious; Congress set targets that envisioned growth at a pace that far exceeded historical growth rates. Congress clearly intended the RFS program to incentivize changes that would be unlikely to occur absent the RFS program. Thus while EPA is proposing to use the tools provided by Congress to waive the annual volumes below the statutory levels, we are proposing standards that are directionally consistent with Congress’ clear goal of increasing renewable fuel production and use over time. The proposed volumes would require significant growth in renewable fuel production and use over historical levels. EPA believes the proposed standards to be ambitious but within reach of a responsive marketplace."

In other words, pulling back the ethanol mandate slightly will help better match it up with consumption, which has been slowed by adverse market conditions and lower overall gasoline use in the last 2 years.

"We must recognize real-world limitations to growth in renewable fuels development in the future. That includes slower cellulosic development, less gasoline use and constraints to biofuels for consumers," McCabe says.

Though the ethanol portion of the RFS mandate was lowered, the biodiesel target was raised slightly on Friday, with the total amount rising from the noted 1.63 billion gallons in 2014 to 1.90 billion gallons in 2017 (Friday's announcement applies up to 2016 for ethanol, but 2017 for biodiesel). That's a 27% increase, McCabe says, but is "achievable and consistent with Congress's intent to drive renewable fuel usage up."

The adjustments announced Friday were met with mixed reaction from the ag lobby, with cheers from the soybean sector and jeers from the corn side. For corn, National Corn Growers Association (NCGA) president Chip Bowling says it undercuts a significant piece of the overall domestic corn demand pie.

"Once again, the EPA has chosen to ignore the law by cutting the corn ethanol obligation 3.75 billion gallons from 2014 to 2016. This represents nearly a billion and a half bushels in lost corn demand. The only beneficiary of the EPA’s decision is Big Oil, which has continuously sought to undermine the development of clean, renewable fuels. Unfortunately, the EPA’s gift to Big Oil comes at the expense of family farmers, American consumers and the air we breathe," Bowling says in an NCGA statement released Friday. "The Renewable Fuel Standard was working as intended, with no need to change. It has reduced greenhouse gas emissions, decreased our reliance on foreign oil, lowered gasoline prices for consumers, increased economic stability in rural America and spurred innovation in advanced and cellulosic biofuels. We are evaluating our legal options for defending the law and protecting the rights of farmers and consumers. We will fight to protect and build profitable demand for corn, which is of fundamental interest to NCGA and our farmers."

Soybean farmers and the biodiesel business, on the other hand, see Friday's bump in the biodiesel mandate as a demand feeder, something that could underpin better soybean prices moving forward in the long term.

"We are glad to see the volumes for biomass-based diesel increased above the previous proposal. Biodiesel provides significant economic and environmental benefits and we have the capacity to do more. The administration wants to address climate change and reduce greenhouse gas emissions and biodiesel -- a domestically produced, renewable fuel that is proven to achieve emissions reductions up to 86% better than petroleum diesel -- can contribute more to that effort," says American Soybean Association president Wade Cowan. "We’re hardly done fighting for biodiesel. As we have in the preceding months and years, ASA will continue to point out the benefits and importance of this critical market for soybean farmers."

The lines were drawn on the same sides of the battlefield more specific to the biofuels industry reaction on Friday; American Coalition for Ethanol (ACE) executive vice president Brian Jennings said the EPA is essentially giving in to the oil industry in pulling back the reins on ethanol production and limiting any benefit to the federal government's funding of more blender pumps around the U.S. to encourage more ethanol use.

"Promises to get the RFS back on track and USDA funding for flex fuel pumps are appreciated, but EPA is yet again proposing to circumvent the RFS by limiting ethanol use to the amount oil companies are willing to blend with the gasoline they refine and not one gallon more. It’s like the NFL saying it’s ok for the New England Patriots to deflate footballs while everyone else must play by the rules," Jennings said in an ACE statement Friday. "EPA was forced to withdraw their original 2014 proposal because the law doesn't allow them to use the blend wall to set levels and doing so undermines the integrity of the program. The good news is that there is still time to get the RFS back on track. We will provide ACE members and biofuel supporters a platform to once again blitz EPA with comments before the final rules are issued on November 30."

Though he says Friday's announcement is not the silver bullet to boosting biodiesel -- both that made through conventional and advanced means -- usage countrywide, National Biodiesel Board CEO Joe Jobe said Friday it goes a long way to making sure the federal government's push toward more renewable energy is sustained, with soybean-based fuels being a growing part of that equation.

"This proposal is a significant step in the right direction. It is not perfect, but it will get the U.S. biodiesel industry growing again and put people back to work. I want to thank Administrator McCarthy and Secretary Vilsack for restoring growth to the program and for their commitment to renewable fuels," Jobe says. "Biodiesel has displaced more than 8 billion gallons of petroleum diesel in the U.S. over the last decade. That is an incredible achievement, and we will build on that success under the proposal the EPA released today. However, more can be done, and we particularly look forward to working with the administration on strengthening biodiesel volumes for 2016 and 2017 during the comment period in the coming weeks."

What about the grain market reaction? As of about mid-day on Friday, the trade seemed largely unfazed by the news on the broad scale. There will be gyrations in prices, traders say, but the net effect will likely be light considering other mostly bearish pressures on prices right now.

"It has given a boost to soyoil. Negative corn but so far impact has been muted," says Scott Shellady, TJM Investments Senior VP, and CME Group floor trader.

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