Analysis: White House weighs inflation vs. farmers down in new biofuel mandates

May 16 (Reuters) – The White House is expected to announce in the coming weeks the amount of biofuels, such as corn-based ethanol, that U.S. refineries must blend into their fuel this year, a decision that will force it to tame the weighing consumer inflation against supporting the country’s farmers.

How the government balances competing priorities could play a role in November’s midterm elections, as high consumer prices pose a political threat to President Joe Biden’s Democratic party and Farm Belt voters remain a crucial constituency.

The White House National Economic Council, led by Brian Deese, is poking fun at the numbers to gauge whether lowering blending obligations for ethanol and renewable diesel will help curb rising food and fuel prices, according to two sources familiar with the process.

Register now for FREE unlimited access to Reuters.com

Removing mandates for ethanol and advanced biofuels like biodiesel could theoretically lower food costs by reducing demand for corn, soy and other staple crops that have become scarcer since Russia’s invasion of Ukraine. Shortening the mandates could also put pressure on pump prices by lowering blending compliance costs for some oil refineries.

But this would infuriate farmers and the biofuel industry, who insist that annual blending mandates are critical to earning a living.

White House officials meet with lobby groups representing oil and consumer goods giants, including the Food Manufacturing Coalition, American Bakers Association, American Petroleum Institute and Renewable Fuels Association, as they weigh up potential changes.

“I’ve never seen such a confluence of issues in the history of the program that could potentially affect the outcome. If there was a perfect storm, this is it,” said Michael McAdams, president of the Advanced Biofuels Association .

In late April, the Environmental Protection Agency sent its proposal on biofuel volume mandates for the years 2020 through 2022 to the White House for final review. The proposal would retroactively lower the mandate for 2020 and 2021, but raise it again for 2022, three sources told Reuters. The EPA declined to comment.

ETHANOL AND HIGH GAS PRICES

The US Renewable Fuel Standard, which went into effect in 2005, requires refineries to blend biofuels such as ethanol into their fuel supply or purchase credits from refineries that do. The program has been an economic boon to states like Iowa and Nebraska, but smaller refiners that haven’t invested in blending facilities say the cost of buying credit threatens their factories.

U.S. ethanol-linked credits are trading at more than $1.60 each, the highest since August, while biomass-based credits are over $1.80 each, nearly the highest since June. Ethanol credits, which traded just 8 cents apiece in early 2020, have remained at historically higher levels since last year.

Economists say some of the cost of credit is being passed on to consumers, resulting in higher pump prices. Some refiners and their union members are encouraging the White House to cut the ethanol mandate below 15 billion gallons by 2022 to lower the cost of credit.

Without the cost of compliance credits, however, adding ethanol to the country’s fuel supply can actually lower pump prices, expanding the total volume of available fuel with a substance that is cheaper than regular gasoline.

The White House took advantage of that momentum earlier this year by announcing that it was lifting a summer ban on the sale of higher ethanol blends of gasoline, called E15.

FOOD VS FUEL

Corn-based ethanol accounts for the vast majority of mixing under the RFS. By 2022, the EPA proposal would require refineries to blend 15 billion gallons of ethanol and 5.77 billion gallons of advanced biofuels.

In recent years, while demand for ethanol has stagnated, the demand for advanced biofuels such as renewable diesel and sustainable jet fuel has surged as states such as California and Oregon have adopted their own renewable fuel mandates. This has increased the demand for oilseeds such as soybeans and canola, which serve as feedstocks for biofuels and compete with other food crops for a finite planting area.

The edible oils are used in everything from cakes, chocolate and deep-frying fats to cosmetics, soaps and cleaning products.

Robb MacKie, president of the American Bakers Association, which includes companies such as Kroger Co (KR.N) and Tasty Baking Company, first expressed concerns about the supply and prices of these products to the EPA last year and asked for the mixing levels back to 2020 levels.

Then the Russian invasion of Ukraine in February made the problem worse.

Russia and Ukraine account for nearly one-third of global wheat and barley production and two-thirds of global exports of sunflower oil used for cooking. Indonesia also recently banned palm oil exports, cutting off more than half of the global supply.

Soybean futures are up more than 20% to over $16 per bushel so far this year, while corn futures are up about 30% to over $7.90 per bushel.

“In light of what we’re going through, alarm bells are ringing,” MacKie said.

Register now for FREE unlimited access to Reuters.com

Reporting by Jarrett Renshaw and Stephanie Kelly; Editing by Heather Timmons, Richard Valdmanis and Marguerita Choy

Our Standards: The Thomson Reuters Trust Principles.

Leave a Comment