Analysis: White House Considers Inflation Impact on Farmers in New Biofuel Mandates By Reuters

By Jarrett Renshaw and Stephanie Kelly

The White House is anticipated to reveal in the coming weeks the required volumes of biofuels, such as corn-based ethanol, that U.S. refiners need to incorporate into their fuel for this year. This decision will require careful consideration, as it must balance the need to address consumer inflation with support for American farmers.

The administration’s approach to resolving these conflicting priorities could influence the upcoming midterm elections in November, especially since rising consumer prices pose a political challenge for President Joe Biden’s party, while agricultural voters are a vital constituency.

Led by Brian Deese, the White House National Economic Council is analyzing data to determine if reducing blending mandates for ethanol and renewable diesel could help mitigate escalating food and fuel costs, according to sources familiar with the discussions.

Reducing mandates for ethanol and advanced biofuels like biodiesel could potentially decrease food prices by lowering the demand for key crops such as corn and soybeans, which have seen constrained supply since the conflict in Ukraine. Additionally, easing these mandates might alleviate pressure on fuel prices by reducing compliance costs for some oil refiners.

However, this course of action could provoke backlash from farmers and the biofuels sector, who argue that the annual blending mandates are vital for their economic stability.

White House officials are engaging with various lobbying groups, including representatives from major consumer goods and oil industries, as they consider potential adjustments to the blending requirements.

Michael McAdams, president of the Advanced Biofuels Association, remarked on the unusual convergence of issues affecting the outcome, calling it a "perfect storm."

Earlier this year, the Environmental Protection Agency submitted its proposal regarding biofuel volume mandates for 2020 through 2022 to the White House for final evaluation. The proposal seeks to retroactively lower the mandate for 2020 and 2021 while increasing it for 2022, although the EPA declined to comment on the matter.

The U.S. Renewable Fuel Standard, introduced in 2005, mandates refiners to blend biofuels like ethanol into their fuel mix or purchase credits from those who do. While this program has benefited states like Iowa and Nebraska economically, smaller refiners lacking blending facilities argue that the expenses associated with buying credits threaten their operations.

Currently, U.S. credits linked to ethanol are trading above $1.60, the highest level since August, with biomass-based credits also nearing record highs since June. The ethanol credits had plummeted to just 8 cents in early 2020 but have remained at elevated levels since last year.

Economists indicate that a portion of these credit costs is passed on to consumers, leading to increased fuel prices. Some refiners, alongside their union proponents, are urging the administration to reduce the ethanol mandate below 15 billion gallons in 2022 to lower credit costs.

Notably, without the compliance credit expenses, integrating ethanol into the fuel supply can actually result in lower fuel prices, given that ethanol is less expensive than standard gasoline. Earlier this year, the White House leveraged this dynamic by lifting restrictions on summer sales of E15, a higher ethanol blend.

Ethanol constitutes the majority of the blending under the Renewable Fuel Standard. For 2022, the EPA’s proposal mandates that refiners blend 15 billion gallons of ethanol and 5.77 billion gallons of advanced biofuels.

In recent years, while ethanol demand has stagnated, the demand for advanced biofuels such as renewable diesel and sustainable aviation fuel has surged, particularly in states like California and Oregon that have implemented their own renewable fuel standards. This rising demand for oilseed crops like soybeans and canola has intensified competition for land with other food crops, affecting overall food supply.

Robb MacKie, president of the American Bakers Association, expressed concerns regarding supply and pricing of food products last year, advocating for a rollback of blending levels to the figures recorded in 2020. The situation worsened following Russia’s invasion of Ukraine.

This conflict, along with export bans from countries like Indonesia, has dramatically affected global supply chains, significantly impacting the production of essential ingredients.

As a result, soybean futures have surged over 20% this year, exceeding $16 per bushel, while corn futures have risen approximately 30%, surpassing $7.90 per bushel.

MacKie noted, "In light of what we are experiencing, the alarm bells are ringing."