Study summarizes RFS impact

By Kris Bevill | March 10, 2008
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The Food and Agricultural Policy Research Institute recently summarized the results of a study in which it estimated what impacts the enhanced renewable fuels standard in the Energy Independence and Security Act of 2007 would have on biofuel and agricultural markets. The detailed report is meant to serve as a snapshot of the estimated impacts of some of the provisions in the bill.

The analysis focused on just two provisions of the legislation: one that calls for 15 billion gallons of corn-based ethanol to be utilized by 2015 and another that says 1 billion gallons of biomass-based diesel should be used by 2012.

According to the report, if biofuel tax credits and tariffs are extended, the EISA will result in a 24 percent increase in corn-based ethanol production from 2011 to 2016. Biodiesel production would increase by 89 percent during the same time period. Corn area will expand by 2 million acres, while soybean acreage will remain essentially unchanged. Corn prices are predicted to rise by 8 percent, and soybean oil prices will increase by 36 percent. Higher prices for corn will mean increased feed costs for cattle, hog and dairy farmers.

However, a reduction in soybean meal prices may help to offset costs. Average crop receipts are expected to increase by $6 billion from 2011 to 2016, resulting in the average annual net farm income increasing by $3.4 billion.

The two provisions were determined to have a significant impact on biofuel and agricultural markets. Implications listed in the study ranged from the obviousthat mandates would result in more ethanol and biodiesel production than otherwise would occurto more in-depth observations, such as:

Impacts of higher mandates are very sensitive to the price of petroleum, and assumptions regarding the extension of current biofuel tax credits and tariffs.

Lower petroleum prices are generally associated with lower biofuel prices and production levels when there isn't a binding mandate. When petroleum prices are sufficiently high, corn-based ethanol production would likely exceed the levels specified in the EISA.

Under the EISA, biofuel prices and production are less affected by the extension or expiration of tax credits and tariffs. Tax credit and tariff policy choices have important implications for taxpayers, consumers and biofuel producers in other countries.

The use of waiver authority established in the EISA could prove very important. Study results suggest that biodiesel and soybean oil prices will be much higher if the mandate is met than if it is waived.

Provisions not considered in this study included the use of cellulosic ethanol and other "advanced biofuels." The report said "this omission does not imply that the provisions are unimportant." It was only a preliminary analysis, meant to provide a partial and tentative evaluation of the legislation. The institute may explore other provisions in the future. The FAPRI has already begun compiling information for a report that will include recent market developments and will likely change both short- and long-run projections.