RIN Values: What Do They Tell Us about the Impact of Biofuel Mandates?
The impact of the US drought on the price of corn and other feed grains and oilseeds has made the arcane subject of Renewable Identification Number (RINs) and the role of US biofuel policy of great interest this year. For example, there have been a number of recent calls to the EPA for waivers of the RFS mandates to relieve pressure on food prices for consumers and feed prices for livestock producers. In this post we review the basic economics of the ethanol market both with and without the RFS mandate, and discuss RIN valuation under both conditions. We then provide some speculation as to the support the RFS mandates are currently providing to corn prices based on recently observed RIN prices.
Preliminary Assessment of the Drought's Impacts on Crop Prices and Biofuel Production
Drought has sharply decreased the size of the US corn and soybean crops this year. While there is no way of knowing for sure how low yields will go, the continuation of hot and dry weather in the major corn and soybean producing areas indicates that yield losses could be of historic proportions. The potential economic impact of low yields-particularly corn yields-is heightened this year because of a low buffer stock of corn, and because 10 percent of our motor fuel supply comes from corn. This briefing paper presents preliminary estimates of the economic impacts of low US corn and soybeans yields. The impacts are estimated for the 2012â€“13 crop year that begins on September 1st. Because we do not know what future yields will be or what future gasoline prices will be, we make the preliminary estimates using a stochastic partial equilibrium model. This type of model solves for market-clearing prices for a large number of random "draws" of yields and gasoline prices. The model is calibrated to information that is available to us at the current time, including the USDA's supply and demand projections and the level of futures prices for gasoline, corn, and ethanol.
Renewable identification number markets: draft baseline table.
Any opinion, findings, conclusions, or recommendations expressed in this publication are those of the authors and do not necessarily reflect the view of the funding sources. Permission is granted to reproduce this information with appropriate attribution to the authors and FAPRI–MU. The Energy Policy Act of 2005 required at least a mandated volume of biofuel use in the United States, called the Renewable Fuel Standard (RFS). The Energy Independence and Security Act of 2007 increased the overall RFS and created nested sub-mandates for advanced biofuels, biomass-based diesel, and certain cellulosic biofuels. A more generally accessible article outlining the nature of RINs and their relationship to the RFS is available elsewhere. 1 1) the gap between the price that fuel blenders pay to buy biofuels and the prices of biofuels implicit in blended fuels, The obligation to meet the mandates falls on fuel blenders, firms that buy input fuels to mix into final fuels that they sell to retailers. Renewable Identification Numbers (RINs) are the mechanism used to make sure each of these firms meets its share of all the mandates. Domestically produced and imported biofuels sold to fuel blenders in the U.S. can have RINs. Each fuel blender must acquire enough RINs to cover its share of the mandate. The RINs are tradable. They are bought and sold so that the mandates will be binding or non-binding nationwide. It is not necessary for every blender to use at least their share of the mandated amount of biofuels, but each blender is obliged to acquire RINs to meet their mandate either by buying the biofuels themselves or by buying RINs from other fuel blenders who use extra biofuels and sell extra RINs. RIN prices are affected by 2) the transaction costs of trading RINs, and 3) speculation about whether or not the mandates will be binding in the near future, as well as whether or not there will be a waiver. The FAPRI-MU model represents the first component and part of the third component. The price gap component is positive if a mandate is binding. A binding mandate is one that forces blenders to use more biofuels than they would otherwise. In that case, each additional gallon of biofuel blended is at a loss. Blenders have the option to blend biofuels at a loss or buy extra RINs from their peers. Blenders will bid the price of RINs up until it …