May 16 (Reuters) – The White House is expected to announce in the coming weeks the amount of biofuels, such as corn-based ethanol, that US refiners will need to blend into their fuel this year, a decision that will force it to tame the Consumer inflation versus supporting the nation’s farmers.
How the administration balances competing priorities could play a role in November’s midterm election, 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, headed by Brian Deese, is dumping figures to gauge whether lowering blending requirements for ethanol and renewable diesel will help dampen rising food and fuel prices, according to two sources familiar with the process .
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Cutting regulations on ethanol and advanced biofuels like biodiesel could theoretically lower food costs by reducing demand for corn, soy and other staples that have become scarcer since the Russian invasion of Ukraine. A cut in mandates could also potentially take pressure off pump prices by lowering the cost of blending compliance for some oil refiners.
However, this would anger farmers and the biofuel industry, who insist that annual blending regulations are vital to their livelihoods.
White House officials are meeting with lobby groups representing oil and consumer goods giants, including the Food Manufacturing Coalition, the American Bakers Association, the American Petroleum Institute and the Renewable Fuels Association, as they weigh possible changes.
“I have never seen in the history of the program how such a confluence of issues could affect the outcome. If there has been a perfect storm, this is it,” said Michael McAdams, President of the Advanced Biofuels Association.
The Environmental Protection Agency sent its proposal for 2020-2022 biofuel volume mandates to the White House for final review in late April. The proposal would retrospectively lower the mandate for 2020 and 2021 but increase it again for 2022, three sources told Reuters. The EPA declined to comment.
ETHANOL AND HIGH GAS PRICES
The US Renewable Fuels Standard, enacted in 2005, requires refiners to blend biofuels like ethanol into the fuel pool or buy credit from refiners that do. The program has been an economic boon for states like Iowa and Nebraska, but smaller refiners that haven’t invested in blending plants say the cost of buying credit is threatening their assets.
Ethanol-linked US credits are each trading above $1.60, the highest since August, while biomass-based credits are each above $1.80, almost the highest since June. Ethanol credits, which were trading at just 8 cents apiece in early 2020, have remained at historically higher levels since last year.
Economists say some of the cost of borrowing is passed on to consumers, resulting in higher pump prices. Some refiners and their union supporters are encouraging the White House to lower the ethanol mandate to below 15 billion gallons in 2022 to lower borrowing costs.
Without the cost of compliance credits, however, adding ethanol to the nation’s fuel pool can actually reduce pump prices by expanding the total volume of fuel available using a substance cheaper than straight gasoline.
The White House capitalized on that momentum earlier this year by announcing that it would lift a ban on summer sales of higher-ethanol blend gasoline, called E15.
FOOD VERSUS FUEL
Corn-based ethanol makes up the overwhelming majority of blends under the RFS. In 2022, the EPA proposal would require refiners to blend 15 billion gallons of ethanol and 5.77 billion gallons of advanced biofuels.
While demand for ethanol has stagnated in recent years, demand for advanced biofuels like renewable diesel and sustainable aviation fuel has surged as states like California and Oregon passed their own renewable fuels mandates. This has increased demand for oilseeds such as soybeans and canola, which are feedstocks for biofuels and compete with other food crops for limited acreage.
The edible oils are used in everything from cakes, chocolate and frying fats to cosmetics, soaps and detergents.
Robb MacKie, president of the American Bakers Association, which includes companies like Kroger Co (KR.N) and Tasty Baking Company, first raised concerns with the EPA last year about the supply and pricing of these products, and called for mix levels to be lowered are withdrawn from 2020 levels.
Then Russia’s invasion of Ukraine in February made the problem worse.
Russia and Ukraine account for nearly a third of world wheat and barley production and two-thirds of world exports of sunflower oil used in cooking. Additionally, Indonesia recently banned the export of palm oil, cutting off more than half of the world’s supply.
Soybean futures are up over 20% so far this year to over $16 a bushel, while corn futures are up about 30% to over $7.90 a bushel.
“In light of what we’re going through, alarm bells are ringing,” MacKie said.
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Reporting by Jarrett Renshaw and Stephanie Kelly; Edited by Heather Timmons, Richard Valdmanis and Marguerita Choy
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