Drought concerns and RFS waivers

Governors request RFS waivers due to drought; notable differences between U.S. ethanol and biodiesel industries
By Ron Kotrba | August 15, 2012

By nearly all accounts, North Carolina is a pro-biofuels state, which is why I was surprised after coming back from my vacation in that beautiful state of mountains, piedmont and sandy shores, to see a letter to from North Carolina Gov. Beverly Perdue to the U.S. EPA asking to waive the RFS due to drought and the potential for economic hardship as a result.

“The imposition of a 15.3 billion gallon renewable fuel standard (“RFS”) in 2012, coupled with the prospect of a 16.55 billion gallon standard in 2012, has imposed severe economic harm to my state’s swine, poultry, dairy, and cattle producing regions,” Purdue said in the letter. “While the severe drought that our nation has experienced is an underlying factor in current economic conditions, the direct harm is caused by the RFS requirement to utilize ever-increasing amounts of corn and soybeans for transportation fuels, severely increasing the costs of producing food and further depleting already severely stressed grain supplies.”

The drought we are experiencing in the U.S. is a very serious issue, and depending on how it plays out, can be devastating in many ways. But clearly the corn ethanol industry is in a much different boat than the biodiesel industry when it comes to roles these sectors play in a drought situation. Granted the old phrase about rising tides elevate all ships may apply here—meaning that when corn prices go up, so will other crop prices such as soybeans, sunflower and canola—it’s important to note at this juncture some major differences between the U.S. ethanol and biodiesel industries.

Today, nearly all of the ethanol produced in the U.S. comes from corn. For biodiesel, while soybean oil is a major feedstock and about 50 percent of U.S. biodiesel is made from soy oil, the rest of the feedstock comes from a diverse mix of various other crop oils like canola, in addition to animal fats, used cooking oil, sewer grease, not to mention emerging nonfood crops such as camelina and pennycress, among others. After the record soy prices of 2008, many biodiesel producers who were only able to process virgin crop oils retrofitted their plants to allow for multifeedstock processing, giving them a better chance at survival while riding out the ups and downs of the commodities markets. It’s also important to note that the oil in soybeans constitutes less than 20 percent of the bean, so the animal feed demand drives the crush, and the remaining oil byproduct uses are varied, and include biodiesel production. For corn, however, two thirds of the kernel is starch, which is what ethanol producers use to ferment into fuel alcohol, and the remaining third is animal feed known as distillers grains. Also, the corn ethanol mandate is around 15 billion gallons, again, most of which will come from corn. The biomass-based diesel mandate is a fraction of that, 1 billion gallons this year, which, again, will come from a variety of feedstock sources.

Given all of this, is it a possible scenario that if EPA decides to grant a waiver on the basis of economic hardship due to the ongoing drought, that it would only apply to corn ethanol (“conventional starch-based biofuel”)? Or if the federal government grants a waiver would it (or indeed should it) apply across the board?

Several other governors have filed similar RFS waiver requests with the EPA, including Arkansas Gov. Mike Beebe, Maryland Gov. Martin O’Mally, and Delaware Gov. Jack A. Markell.

Anecdotally speaking, when I was in North Carolina (the eastern part of the state) for the past two weeks, I talked to several people about the condition of the local crops and the drought, and they all told me that the drought wasn’t an issue there. In fact, it rained more than I wished it would have.

 

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