Three Takeaways from the EPA's Renewable Fuel Proposal for 2020-2021

Over the last three to four months, a lot has been debated about the future of U.S. domestic biofuel policy, or the Renewable Fuel Standard (RFS) program. During these negotiations, both “big corn” and “big oil” were pitted against each other.

The impact of proposed policy changes on the American farmer has been confusing and, at times, mixed.

Against the backdrop of a seemingly endless stream of information coming from Washington about the future of RFS, the Environmental Protection Agency (EPA) publicly released their proposal for the 2020 and 2021 RFS on October 15.

Three things to know about the EPA’s latest RFS proposal

Here are our three key takeaways from the latest proposal for the RFS program in 2020 and 2021:

1. The Small Refinery Exemption (SRE) is at the heart of the domestic renewable debate and treatment of this category pits big oil against the U.S. farmer.

SRE production exemptions are available to small U.S. refineries that can prove they are suffering from financial distress. The waivers are granted by the EPA and essentially free the producer from their production obligations under the Renewable Fuel Standard (RFS) to blend biofuels like ethanol into their gasoline. During August, the EPA increased the number of SREs to 31, which is the highest number of exemptions granted since the RFS was established in 2005.

Since 2016, the EPA has granted 85 waivers to oil refineries, exempting them from using a total of 4 billion gallons of renewable fuel. These exemptions have reduced corn demand by an estimated 1.4 billion bushels. Lost biodiesel production due to the production waivers is estimated at 365 million pounds of soybean oil, which essentially is equal to the entire state of Iowa’s yearly biodiesel production.

2. The biggest policy proposal that occurred last week was EPA’s plans to change the method for how lost SRE production volumes are estimated.

Under the EPA’s recent proposal, SRE exemption volumes will be suggested to the EPA by the Department of Energy (DOE). The proposal set forth on October 4 was for the EPA to estimate the annual volume of waived production by using a 3-year average of waived gallons under the SRE. This is a key policy development because it is estimated that the averaging method would result in fewer gallons being exempt from production. The averaging method was a preferred policy and one that would have been more beneficial for the U.S .farmer. 

3. The EPA’s proposals for RFS mandates in 2020 and 2021 remain at 15 billion gallons of annual ethanol production.

This lower proposed output represents a policy shift, whereas it had been projected to rise to 16 billion gallons. Meanwhile, biodiesel production is expected to rise incrementally to 2.43 billion gallons.

Annual Soybean Oil for Biodiesel Use

corn-renewable-energy-production

Conclusion

Ultimately, we believe that the recent debate of the American biofuels program has pitted big oil against big corn and, for the moment, it seems like big oil is the winner. While the above items are suggested changes by the EPA, they represent the end of negotiations and a move toward final government policy. A public hearing will take place on October 30, which will be followed by a 30-day period for open comments.

We believe that the increased numbers of SREs that have been granted by the EPA -- along with a proposed change in how these production volumes are granted -- are negative for U.S. corn and soy producers. The increased number of production waivers reduces the demand for corn and soybeans, and reduced demand has the ability to pressure local basis.

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