IDEAS home Printed from https://ideas.repec.org/p/ias/cpaper/12-pb9.html
   My bibliography  Save this paper

Outlook for Ethanol and Conventional Biofuel RINs in 2013 and 2014

Author

Listed:
  • Bruce A. Babcock

Abstract

The US ethanol industry faces numerous challenges over the next two years. The 2012 drought sharply increased corn prices, so profit margins will be low until least the 2013 corn crops are harvested. A saturated ethanol market means that ethanol mandates that are scheduled to be implemented in the next two years can possibly be met only if ethanol prices are heavily discounted. Thus, profit margins will continue to be low even if production costs fall after the next crop is harvested. In addition, buyers of ethanol can draw on blending credits they have accumulated over the last few years in lieu of ethanol to meet their obligations under the Renewable Fuel Standard (RFS). These banked credits are called RINs (Renewable Identification Numbers) and allow the Environmental Protection Agency (EPA) track how much renewable fuels are being used. When domestic consumption of ethanol exceeds mandated levels, the surplus RINs can be banked to meet future mandates. This policy brief provides insights into how the next two years will unfold in the ethanol market by focusing on whether the supply of banked RINs will be used in 2013 to help offset current high production costs or in 2014 to help offset low ethanol prices. The guiding principle of the analysis is that owners of banked RINs will use them when they have the greatest value. This principle implies that RINs will be used in 2013 until their 2013 value is equal to their expected value in 2014. The analysis indicates that because of the E10 blend wall and high ethanol production costs, a significant portion of banked RINs will be used in 2013. If, as seems likely, imported sugarcane ethanol is used to meet the portion of the advanced biofuels mandate that is not met by biodiesel meeting its own mandate, then almost all the banked RINs should be used in 2013. This result assumes that corn yields return to trend-line levels in 2014. If sugarcane ethanol is not imported to meet the advanced mandate, then fewer banked RINs will be needed in 2013 to offset heavily discounted ethanol prices. Whether sugarcane ethanol is used or not, the fundamental market forces indicate that RIN prices will be low in both 2013 and 2014. The ability to use banked RINs increases the feasibility of meeting the 2013 and 2014 mandates and is what keeps expected RIN prices low in both years. Low future prices are why conventional biofuel RIN prices are so low today. This result, though, depends on the assumption that heavily discounted ethanol will incentivize significant amounts of additional ethanol consumption from owners of flex fuel vehicles or by an unexpectedly large and rapid movement to use of E15. If this additional consumption does not materialize, then it seems that EPA will have no choice but to waive conventional ethanol mandates in 2014 because mandated consumption will exceed the ability of consumers to use ethanol as a fuel. Such a waiver, were it to occur, would also validate current low RIN prices.

Suggested Citation

  • Bruce A. Babcock, 2012. "Outlook for Ethanol and Conventional Biofuel RINs in 2013 and 2014," Center for Agricultural and Rural Development (CARD) Publications 12-pb9, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  • Handle: RePEc:ias:cpaper:12-pb9
    as

    Download full text from publisher

    File URL: https://www.card.iastate.edu/products/publications/pdf/12pb9.pdf
    File Function: Full Text
    Download Restriction: no

    File URL: https://www.card.iastate.edu/products/publications/synopsis/?p=1179
    File Function: Online Synopsis
    Download Restriction: no

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ias:cpaper:12-pb9. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://edirc.repec.org/data/caiasus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.