Food vs. Fuel Debate Cranks Up the Pressure On US Renewable Fuel Mandate

By: Frank Quin
Frank Quin
Frank is a native New Zealander with a wealth of experience. A lawyer by background Frank was commercial law… read more.
on Aug 8, 2012

With the relentless march of drought conditions across the continental United States, concerns are growing internationally as to the impact on world food prices going into the autumn and beyond into 2013. The US is the world’s largest producer and exporter of corn, a staple which finds its way into a range of human and, critically, animal food products. Real fears are now being expressed that the inevitable US shortage could trigger price shocks equalling or exceeding those of 2008.

Those fears have been compounded by the ongoing diversion of much of the US corn harvest to so far survive the drought into ethanol production. In an opinion piece for the Financial Times on 9 August, UN Food & Agriculture Organisation (FAO) chief José Graziano da Silva noted that, making allowances for drought impact, something like 40 percent of American corn production will this year go to ethanol. This is driven by the Renewable Fuel Standard, the congressional edict that will require more than 13bn gallons of corn-based ethanol to be used in transport this year, regardless of the corn price. Simply put, that mandate sucks over 120 million tonnes of corn out of the food-chain and puts it in the petrol-tank.

!m[](/uploads/story/247/thumbs/pic1_inline.png)In the cautious language of international diplomacy, director-general da Silva calls on Washington to recalibrate, at least for now, its energy policy by easing the foot on the ethanol pedal. He writes, ‘An immediate, temporary suspension of [the US ethanol] mandate would give some respite to the market and allow more of the crop to be channelled towards food and feed uses.’

This call from the very top of the United Nations echoes concerns elsewhere expressed that the aggressive US support for ethanol production is creating market distortions which ripple out across the globe. France, India, China and other members of the Group of 20 (ie, leading economies) have called on the United States to exercise restraint.
A call supported domestically as well – back in July, as drought effects started to become apparent and corn prices started to rise in response, beyond $8 per bushel for the first time ever, a coalition of US meat producers added its voice to the debate. Representing farmers from major livestock-raising states, the lobby group has urged suspension of the Renewable Fuel Standard for at least 12 months, the objective being to afford relief on animal feed prices, a livestock farmer’s single largest overhead.

To this point, the response from the federal government has been muted, with Washington leaving it to the EPA – the Environmental Protection Agency, which administers the ethanol mandate – to provide a response to the waiver request. In a statement at the end of July, the agency duly responded in cautious fashion: “We are in close contact with USDA as they and we keep an eye on crop yield estimates, and we will review any data or information submitted by stakeholders, industry and states relating to the RFS programme.”

But a previous waiver request, from the state of Texas back in 2008, fell on deaf ears. It’s not obvious that things will be different this time round.
Except that in November there’s to be a presidential election in the United States. It’s at least possible that the livestock farmers – a big voting block in big states like Texas – will make their voice heard more loudly than the environmental lobby, much more dispersed and less likely to vote en masse.
It wouldn’t be surprising also if the voice of the American farming vote carries more weight going into the autumn than calls from on high internationally. Either way, a cut-back on the ethanol mandate may yet see relief for international cereals pricing before year’s end.

Are you looking for fast-news, hot-tips and market analysis? Sign-up for the Invezz newsletter, today.

Invest in crypto, stocks, ETFs & more in minutes with our preferred broker, eToro
10/10
67% of retail CFD accounts lose money