As Washington begins the year as the focal point of the nation’s and the world’s battle against economic malaise, one must be particularly attentive to the likely dramatic growth in acronyms. Acronyms are words formed from the initial letters of the parts of a compound term. For example, the D.O.D. is the Department of Defense, the I.R.S. is the Internal Revenue Service, and so on. Government produces more acronyms than the average citizen can recall.
The new largess of the Treasury Department, the Federal Reserve Bank and Congress will lead to a multiplicity of programs and, therefore, acronyms. Acronyms are only dangerous when they create an innocuous veneer that discourages people from looking beyond or beneath the acronym to understand the implications of the program.
The current government program to encourage production of biofuels in the United States created the Renewable Fuels Standard (R.F.S.), which required the fuel marketing industry to use in blends of gasoline and diesel fuel a minimum amount of ethanol and biodiesel respectively each year. The mandated amount increases each year through 2022.
For corn producers and processors — both wet and dry millers — the operative category is "conventional biofuel." According to the Renewable Fuels Association (R.F.A.), "conventional biofuel is ethanol derived from corn starch." This does not include cellulosic biofuels for which there is another mandated volume requirement if and when they become available. The Environmental Protection Agency (E.P.A.) may waive the mandates if sufficient cellulosic biofuels are not available as the mandate ratchets upwards.
The conventional biofuel mandate tops out in 2015 at 15 billion gallons. In 2008, the target was 9 billion gallons of conventional biofuels. Both in capacity and usage the ethanol industry exceeded that mandate. Although final annual volumes are not yet published, for September, production and importation of ethanol ran at an annual rate of 10.96 billion gallons. Usage for September was at a rate of 10.4 billion gallons per annum. It is certain that U.S. fuel marketers have sold more than the 9 billion gallons in 2008 required under the R.F.S. mandate.
Enter the RIN. The Renewable Identification Number, or RIN, accompanies every gallon of ethanol or biodiesel that is produced in or imported into the United States. A RIN is a 38-character numeric code that is generated by the producer or importer of renewable fuel representing gallons of renewable fuel. A RIN is assigned to batches of renewable fuel that are transferred through a change in ownership to others in the distribution channel.
A key factor is that RINs are valid for the calendar-generated year or the following year. Each year each "obligated party" under the R.F.S. — a seller of fuel to consumer — must report to the government that it has met its Renewable Volume Obligation (R.V.O.) under the R.F.S. program. The reporting requires submission of RINs to the government.
Remember that in 2008 with gasoline (R.B.O.B.) prices spiking above $4 a gallon and ethanol prices lagging, marketers pushed through ethanol volumes well above mandated levels. They captured the entire blenders credit plus 50c to $1 more. Now gasoline prices have fallen dramatically. R.B.O.B. in New York is at $1.24 per gallon and the nearby ethanol contract on the Chicago Board of Trade (C.B.O.T.) is trading at $1.68 per gallon. The overwhelming financial incentive to blend ethanol has decreased.
Therefore the 2008 RINs, like AT&T’s rollover minutes, may be used in 2009 to satisfy a portion of the R.O.V. requirements of the E.P.A. under the R.F.S.
As was learned last year it is imprudent to assume $50/B.B.L. crude oil or $4 per bu corn or $1.67 per gallon ethanol will continue. Those prices may switch dramatically over the course of the year, changing the market dynamics dramatically. There is no doubt that the existence of the carryover RINS from 2008 will reduce the mandated use of ethanol in 2009 below the nominal 10.5 billion gallons. The impact of that for the corn processing industry will ultimately be determined by the interplay of the prices of feedstock, byproducts and gasoline, but carryover RINs don’t help demand.
There are a number of ethanol related proposals being floated by new administration by industry groups, so the R.F.S. rules might change. But one thing is certain, the federal government will produce more acronyms and one ignores acronyms at one’s peril — what seems benign may be a problem.