RFS Volumes Set

OMAHA (DTN) -- The much-anticipated, three-year Renewable Fuel Standard volumes released Monday came in below overall volumes set in the 2007 law but higher than EPA proposed back in April, and include corn-based ethanol volumes below the statutory cap of 15 billion gallons.

The EPA announced a three-year program through 2016 that includes biofuels volumes below those set in the 2007 law. The agency also announced biomass-based diesel volumes through 2017. The overall RFS cuts came about as a result of overall decreased demand for gasoline, reflected in about a 20% reduction in overall biofuels volumes in the RFS.

EPA used a waiver rule to change the blend volumes required by petroleum marketers. Biofuels volumes are set in the final rule at 16.28 billion gallons for 2014, 16.93 billion gallons for 2015, and 18.11 billion gallons for 2016.

EPA's earlier proposed numbers called for renewable blend volumes of 15.93 billion gallons in 2014, 16.3 billion gallons in 2015, and 17.4 billion gallons in 2016.

Under the original 2007 law, overall biofuels blending volumes would have been 18.15 billion gallons in 2014, 20.5 billion gallons in 2015 and 22.25 billion gallons in 2016.

The new rule issued Monday lowers blend volumes from the law by 1.87 billion gallons for 2014, 3.57 billion gallons for 2015 and 4.14 billion gallons.

Corn-based ethanol will see its volumes set below the statutory 15 billion gallons for 2014 and 2015, at 13.57 billion and 13.93 billion gallons, respectively. The blend level is set at 14.27 billion gallons in 2016, although industry groups say producers are poised to produce at least 15 billion gallons.

EPA set cellulosic volumes at 33 million gallons for 2014, 123 million gallons for 2015, and 230 million gallons in 2016.

Much of the anticipation for the announcement centered on the cellulosic ethanol volumes. That industry has for months indicated there was a growing move by companies to send future investments overseas with continued doubt about the RFS.

For years, EPA has had to re-adjust the RFS volumes for cellulosic ethanol. The statute calls for 1.75 billion gallons in 2014, 3 billion gallons in 2015, and 4.25 billion gallons in 2016.

BIODIESEL

The final rule sets the 2014 biodiesel volume at 1.63 billion gallons or effectively the actual volume blended. That number rises to 1.73 billion for 2015, 1.9 billion gallons in 2016 and 2 billion gallons in 2017. The only adjustment EPA made from its proposal was increasing the 2015 number by 300 million gallons.

According to statute, the biomass-based diesel, or biodiesel, volumes are required to be set at a minimum of 1 billion gallons starting in 2012.

The biodiesel industry has seen production falter in the past year as a result of the expiration of the biodiesel blenders tax credit in December 2014. In the past couple of months the industry has been pushing members of Congress to make changes to the credit to create more certainty in the market.

MARKET EFFECTS

DTN Market Analyst Todd Hultman said he doesn't anticipate the announcement doing much to affect the markets.

"If so, I see little market impact for corn prices other than a possible initial bearish response on the actual announcement," he said.

USDA estimates corn demand for ethanol at 5.175 billion bushels for 2015-16, down 1% from 2014-2015. Hultman said that is equivalent to 14.49 billion gallons of ethanol for 2015-2016.

In 2014, 835 million gals of ethanol was exported equal to roughly 298 million bushels of corn.

So far in 2015, ethanol exports are up 7% from a year ago, on track for roughly 319 million bushels of corn to be exported as ethanol.

"Unless EPA's numbers are significantly below 14 billion gallons for 2016, corn is already cheap enough to have commercial support and should be able to absorb this news well," Hultman said.

On the soybean side, he said soybean oil prices probably already got the "most mileage" out of EPA's proposal back in late May/early June.

Soybean oil prices are suffering from plenty of supply and poor demand, Hultman said, trading at their lowest levels in eight years.

"More biodiesel demand helps support prices at these low levels, but is not a significant game-changer for soybean oil," he said.

Industry groups have indicated a legal challenge is likely based on EPA's stated reasons for the reductions: that biofuels supplies are inadequate to meet the expanding RFS, and needed fueling infrastructure isn't in place to handle those volumes.

The current RFS law allows EPA to set the corn ethanol mandate below statutory levels if the agency determines there is inadequate domestic supply of ethanol. Ethanol industry groups have said if EPA uses that authority in this instance a legal challenge may be forthcoming. That's because the combination of renewable identification numbers and actual domestic production are said to be more than enough to meet the full corn ethanol mandate.

When it comes to a waiver based on inadequate fueling infrastructure, the ethanol industry has argued all along if obligated parties such as gasoline blenders had been following the RFS needed infrastructure would be fully in place.

A Congressional Budget Office RFS analysis released early in November said meeting expanding volumetric requirements in the RFS would pose "significant challenges" if the RFS is left in place as the law is written.

Todd Neeley can be reached at todd.neeley@dtn.com

Follow him on Twitter @ToddNeeleyDTN

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