January 27, 2012 | By Elise Schafer
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Proposed RFS Changes Spark Food vs. Fuel Debate

Congress decision to end ethanol incentives adds fuel to the discussion

Ethanol proponents and commodity grower groups nationwide urged Congress to extend the ethanol and biodiesel incentives and tax credits throughout the months leading up to their Dec. 31, 2011 expiration, citing their end would threaten thousands of existing jobs, prevent the creation of new jobs and prohibit the United States from meeting the Renewable Fuels Standard (RFS) and acheive energy independence.

In spite of their efforts, both the 54 cents/gallon tax on imported ethanol and the VEETC (Volumetric Ethanol Excise Tax Credit) of 45 cents/gallon for blenders expired at the close of the year. Now, the United States is able to import less costly fuel alternatives to corn ethanol, such as sugarcane ethanol from Brazil.

In 2005, when the RFS was enacted, it mandated 36 billion gallons of renewable fuel to be blended into transportation fuel by 2022, and created market certainty for the domestic corn ethanol industry. The end of these credits is shaking that certainty. 

Additionally, two newly introduced pieces of legislation aim to either adjust or eliminate the RFS, insuring that energy policy will continue to be hotly debated throughout 2012. Industries that rely on corn, such as the feed industry, argue the RFS is responsible for higher corn — and ultimately, food — prices, while the ethanol industry views the regulation as a pathway toward home-grown renewable fuel and an alternative to dependence on foreign petroleum. While both sides seek solutions to meet the rising global demand for energy and food, each has a different idea of how to get there. 

RFS changes proposed

In September 2011, the Subcommittee on Dairy, Livestock and Poultry held a hearing on feed availability. Phillip Greene, vice president of Foster Commodities and Foster Poultry Farms testified on behalf of the American Feed Industry Association that the RFS’s mandating of food crops for biofuels feedstock at annually increasing levels negatively impacts feed production costs.

Animal feed represents one of the largest uses of corn, a major ingredient in livestock and poultry feeds, and the industry strongly supports any legislation that may ease the challenges that result from taking food crops for biofuels production.

H.R. 3097, the Renewable Fuels Standard Flexibility Act would give the Department of Energy and the Department of Agriculture authority to adjust the RFS for corn-based ethanol when national corn stocks fall below specified levels. The bill was introduced in October 2011 by Reps. Bob Goodlatte (R-VA) and Jim Costa (D-CA).

If passed, the RFS Flexibility Act would allocate grains by market demand rather than government mandates, and could reduce the RFS by as much as half. A major component of the bill is a semi-annual requirement to review the corn stocks-to-use ratio. If the ratio remains above 10%, there would be no adjustments, but if the ratio falls below 10%, adjustments would be made to ensure enough corn supply to meet both the demand for ethanol and feed, as well as other end users’ needs:

• 10% to 7.5% - 10% reduction

• 7.49% to 6% - 15% reduction

• 5.99% to 5% - 25% reduction

• Below 5% - 50% reduction

Goodlatte’s second piece of legislation, H.R. 3098, the Renewable Fuel Standard Elimination Act, was introduced the same day and was referred to the committee on energy and commerce. It would altogether do away with the Renewable Fuels Standard.

Feed industry supports RFS flexibility

In a statement regarding H.R. 3097, the AFIA voiced support of “any effort to eliminate government mandates and equalize market competition for corn.”

Through Greene’s testimony, the association  noted that since feed represents about 70% of the cost of production of meat, dairy and poultry, reduced feed supplies and increased prices heavily impact the average consumer.  

“Anything affecting the cost of producing feed for livestock and poultry, directly impacts the cost of animals to the processor, the cost of meat, milk and eggs to the retailer, and ultimately, the cost of food to the consumer,” said Greene’s testimony.

Other factors may influence food prices

The ethanol industry, however, argues corn ethanol does not significantly impact feed and food prices and believes other factors are to blame, such as food services, food processing and retail trade. Before the hearing in which Greene testified, the American Coalition for Ethanol (ACE) urged the House Agriculture Subcommittee on Livestock, Dairy, and Poultry to consider such other factors.

Brian Jennings, executive vice president of ACE, released a statement pointing out that ethanol bi-products, such as Dried Distillers Grains (DDG), a corn co-product used as a high protein animal feed, may reduce feed costs.

According to Jennings’ statement, “The U.S. ethanol industry will produce 1.7 billion bushels of high quality animal feed this year — almost 4.5 million tons of distiller’s grains — at a cost that is currently only 75% to 80% of the cost of corn. Forward-thinking livestock producers have [found] that feed produced at ethanol plants can economically displace more than its weight in corn, actually reducing their feed costs.”

According to a National Corn Growers Association (NCGA) statement, in 2010, distillers grains produced by the ethanol industry displaced the need for 1.2 billion bushels of corn for the livestock industry.

RFS and jobs

The NCGA also points to job creation as another reason to maintain the current RFS levels.

“The U.S. ethanol industry is an integral part of job creation and economic opportunity throughout rural America,” said Garry Niemeyer, president, NCGA, in a statement. “[H.R. 3097] would put progress made by the ethanol industry in jeopardy and we are asking members of Congress to oppose its passage.”

Niemeyer went on to say there is enough U.S. corn to meet all domestic needs. “The American farmer continues to meet the growing demand for corn as food, feed, fuel and fiber even when facing difficult years. The ethanol industry is saving money for American consumers and producing jobs during a difficult financial time.”

In testimony submitted Sept. 22 to the House Ways and Means Committee, the National Biodiesel Board (NBB) noted that in 2010, when there was a one-year lapse in the credits that are expired today, production dropped dramatically, dozens of plants shuttered and thousands of people lost jobs. But when the credit was re-instated in 2011, ethanol production soared, creating thousands of new jobs.

“[In 2011, biodiesel production was thriving], with plants ramping up production again and hiring new employees. Through July, the industry had produced roughly 475 million gallons compared with 315 million gallons in all of 2010.”

Anne Steckel, NBB vice president of federal affairs, stated that “at least 800 million gallons will support more than 31,000 jobs while generating at least $3 billion in GDP and $628 million in federal, state and local tax revenues, according to a recent economic study conducted by Cardno-Entrix.” 

Since their introduction on Oct. 5, no action has been made regarding H.R. 3097 or H.R. 3098. Both bills were referred to the Subcommittee on Energy and Power. It is uncertain whether the bills will make it out of committee before the 2012 presidential election, but certainly both sides of the food vs. fuel debate will weigh in until a decision is reached. 

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