The Honorable Stephen L. Johnson, Administrator
Re: Support for Gov Perry’s reduction of the RFS
Dear Administrator Johnson,
We respectfully request that you grant Gov Perry’s
request to waive 50% of the federal Renewable Fuel Standard.
It was just 171 days ago that the RFS was increased by 42% over the
quantity of ethanol produced in 2007. The
RFS is a mandate. It demands that
42% more corn must be used in the production of ethanol this year compared to
last year. The only allowed
adjustment, short of additional Congressional action, is for you to announce a
waiver of the RFS.
Back in the late 70’s, during a previous oil crisis, the
ethanol industry was given a protective tariff and a subsidy to encourage
blenders to added ethanol to gasoline in an effort to stimulate growth of the
ethanol production. Even with these
incentives, which are still in place, the industry grew only slowly until it
received a huge boost in demand when the use of MTBE was outlawed in 2006 and
ethanol was found to be an excellent replacement.
At that moment profits at ethanol plants soared and what can only be
described as an “investment frenzy” occurred and literally hundreds of new
ethanol plants were started. It was
during this time period that the price of corn jumped from the $2.00 per bushel
range to the $4.00 range because of the added demand.
But in just a matter of months the price of ethanol dropped rapidly as
sufficient capacity came on line in this country.
The price of corn however did not drop because the amount of corn being
used in ethanol was increasing.
With this backdrop of excess plant capacity and low ethanol
plant profits, Congress in spite of the fact that corn prices had already
doubled, passed EISA in December 07 which mandated the use of 9 billion gallons
of ethanol in this country. The
protection of the tariff was left in place (and its cut off date extended thru
2010), thus insuring that all of the ethanol must be corn based and US produced.
The market response was swift and corn prices have nearly doubled again
with prices today at $7.34 near term and nearly $8.00 for next year.
The
The first doubling of corn prices was probably unavoidable
because the need for enough ethanol to replace MTBE is a valid demand.
That need however is fully supplied at about 5% of our gasoline volume or
5.5 to 6.5 billion gallons of ethanol per year.
The investment of about 700 BTUs of other source energy (almost always
from fossil fuel sources) to get the 700 BTU’s of energy contained in a gallon
of ethanol is likely justified because of the unique properties of ethanol that
make it a good replacement for MTBE. Beyond
that the use of 700 BTUs of fossil fuels to get 700 BTUs of ethanol does nothing
toward moving this country toward energy independence.
The second doubling of corn prices will be devastating to
our industry. World demand for our
dairy products continue to be at all time highs and our industry has been
extremely fortunate to have high prices to cover our high costs.
The problem is that the costs of feed implied by a corn price of $8.00
per bushel generate a cost of production that will require prices even higher
than now exist. Economics is not a
static analysis and prices this high will cause a reaction, but again we stress
that corn prices this high will impact all other crops as acres are realigned
each year. The prospects are frightening.
From the perspective of the authority to waive the RFS
given to you under the terms of EISA, the key fact that must be considered is
that every gallon of ethanol used is preceded by the investment of 700 BTUs of
energy in the growing, fertilizing, harvesting and processing the
corn for a net doubling of emissions when ethanol is used.
We contend that this doubling of the emissions alone is sufficiently
onerous to the environment to justify “a finding that implementing the mandate
would severely harm the environment”.
The second reason allowed would be “that there is
inadequate domestic supply to meet the requirement”.
There is plenty of capacity on line (or scheduled to be on line shortly)
to meet the current mandate. But
there is not enough corn. The
current RFS will require the use of over 35% of the projected corn crop. There
will be 7.5 billion bushels of corn available to all other uses from this
year’s corn crop which is 2.0 billion bushels less than last year’s volume
of 9.5 billion bushels – 21% less corn available.
Consider the competitors for the total corn crop:
First the ethanol industry which because of the RFS must use 4.2 billion
bushels; second the people of the world who must eat; and third the animal
feeding industries which provide milk, eggs and meat to a hungry world.
Our industry is third on this list and any price we offer will be matched
by the other two bidders because they must have product.
At this point Mr. Johnson we ask you to consider whether or not the price
paid by consumers of this world is too high compared to the perceived need for
ethanol. The need for corn as a food
and as a feed for our livestock at some point will trump the perceived need for
the same corn used as fuel. In our
view the current situation calls for at least a pause in the rapid acceleration
of the RFS.
We respectfully request that you grant the waiver requested
by Gov. Perry of
Sincerely,
William C. Van Dam
Executive Vice President