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.
Renewable identification numbers are the tracking instrument and bellwether of US biofuel mandates.
US energy policy mandates minimum levels of biofuel use. The four interdependent mandates of the 2007 legislation - EISA - are defined by their feedstocks and greenhouse gas reduction targets, and are each set to rise over the coming years. If the volumes of use would be below the mandated amount, due perhaps to a low petroleum price or some other circumstance, then the mandate becomes binding. It forces fuel blenders to bid higher the price at which they buy biofuel and discount the price at which they sell biofuels. Conversely, if biofuel use would exceed the mandated volumes anyway, then this policy will not affect markets. Renewable Identification Numbers (RINs) are the traded instruments for implementing these mandates, and key indicators of the degree to which mandates affect biofuel markets, if at all. RIN values will rise if the mandate is binding, as fuel blenders scramble to get enough RINs to meet their mandates. A high RIN price signals that this policy affects biofuel markets, and consequently probably drives agricultural commodity prices higher. But the EISA gives considerable flexibility that will affect RIN values in practice, causing great uncertainty about how they will affect biofuel markets and, through them, agricultural commodity markets. Copyright (c) 2009 The Authors. Journal compilation (c) The Agricultural Ecomomics Society and the European Association of Agricultural Economists 2009.
What's Driving Food Prices?
Preface : The temperature of the rhetoric in the food-versus-fuel debate has been rising right along with the prices of corn and oil. Farm Foundation is not about heat or fueling fires. Our mission is to be a catalyst for sound public policy by providing objective information to foster deeper understanding of the complex issues before the food system today. We commissioned this paper to provide a comprehensive, objective assessment of the forces driving food prices. In recent months, much has been written in the academic and popular press about commodity prices, biofuels and food prices—often with varying perspectives and conclusions. Farm Foundation asked Wallace Tyner, Philip Abbot and Christopher Hurt, all of Purdue University, to review the literature and provide a comprehensive assessment of the forces driving food prices today. The three economists reviewed more than two dozen reports and studies, summarizing them in light of their own examination of the facts. As is true of many issues in the food system, the full story behind rapid increases in food prices is not a simple one. Today’s food price levels are the result of complex interactions among multiple factors—including crude oil prices, exchange rates, growing demand for food and slowing growth in agricultural productivity—as well as the agricultural, energy and trade policy choices made by nations of the world. But one simple fact stands out: economic growth and rising human aspirations are putting ever greater pressure on the global resource base. The difficult challenge for public and private leaders is to identify policy choices that help the world deal with the very real problems created by today’s rising food prices without jeopardizing aspirations for the future. It is the intent of Farm Foundation that the objective information provided in this report will help all stakeholders meet the challenge to address one of the most critical public policy issues facing the world today.