I’ve long admired and relied on the work of the ag economists at Farmdoc Daily, particularly Scott Irwin and Darrel Goode. They’ve done a lot of insightful analysis on the agricultural market impact of biofuel mandates under the Renewable Fuel Standard — analysis that I rely on to make the case for a flexible, cautious approach to implementing the standard to ensure our clean fuel goals don’t come into conflict with food security and climate protection. I was lucky enough to spend a day recently with Scott, Darrel and other researchers at their home base of the University of Illinois, talking over the future of biofuels.
Scott and Darrel are experts in commodity markets, and because biofuels policies interact so strongly with these markets their expertise is crucial to understanding the past, present and future impact of biofuels policies. But as some of their recent analysishas shown, it’s not just that ag markets affect biofuels policy, biofuels policy also affects ag markets.
The three of us sat down for a webcast discussion of biofuels markets and policy withradio station WILL reporter Todd Gleason. It was a wide ranging conversation touching on corn ethanol, the so-called blend wall, sugarcane ethanol, biodiesel, cellulosic biofuels and the decisions facing the Environmental Protection Agency in its administration of the RFS.
As always I learned a lot from listening to these guys. You can watch/listen to the entire conversation above, but if you don’t have an hour to spare, I thought a short transcript of some key points would be useful. I’ve skipped my own part of the conversation, since regular readers of my blog posts have already heard what I have to say about this topic(or can catch up here). Below is an edited transcript of some of their astute observations, which are particularly relevant as we anticipate EPA releasing draft RFS volumes for 2014 any day now.
TODD GLEASON / MODERATOR (TG): Darrel you have looked at soy diesel, its production and potential increases, what do you see in the future for biodiesel in the next 18 months?
DARREL GOODE (DG): For the most part biodiesel production has been driven by the RFS mandate, with somewhere between 50 and 60 percent of the feedstock coming from soybean oil. As we move forward certainly the mandate will be an important component of whether or not biodiesel production expands. The second component is the undifferentiated portion of the mandate, which could be filled with either biodiesel or sugarcane ethanol. On a blending basis it will be the relative economics of biodiesel versus imported sugarcane ethanol that would determine which product would meet that undifferentiated component. Thirdly, depending on the total biofuels mandate and the size of the blendwall, it may not be possible for renewable fuels to meet the total renewable mandate so there is another opportunity for biodiesel (to fill that gap). A number of factors will impact the rate of growth there, but I think the primary factor will be the total advanced mandate that EPA announces.
Editor’s note: If you’re confused, check out our fact sheet on the complex advanced biofuel mandate structure.
TG: Scott, biodiesel production hasn’t been nearly as tied up in the food versus fuel debate as corn ethanol, what is the difference and how does the use of biodiesel affect the use and trade of vegetable oil and soybeans?
Scott Irwin (SI): Of course most directly, biodiesel is made from a feedstock of soybean oil. And soybean oil is one of our main vegetable oils. So potentially that is pulling away food for fuel. Probably why it hasn’t risen as high on the public policy agenda is that, at least here in U.S., the use of soybean oil as the main feedstock for biodiesel just hasn’t been large enough relative to the market size to have the kind of price impacts compared to corn ethanol. The main impact on world markets in terms of linkages basically is if you pull soybean oil into biodiesel production, something else has to come into play to fill that gap. And more than likely that is other kinds of oil, and things like palm oil.
TG: How far along are we towards cellulosic ethanol, and are the grasses, miscanthus, switchgrass that have been looked at viable options?
SI: We’ve actually seen some real strides towards commercialization of cellulosic technology with these plants opening up, at least with several at commercial scale. On the other hand, the scale of production in cellulosic is nowhere near what was hoped for five or six years ago when the RFS were first instituted. For example in 2013 I believe we were supposed to have a billion gallons of cellulosic and there is even argument over whether it will be as high as 6 or 8 million gallons. It gives you a sense of the scale of the difference between what’s actually happening in the marketplace and what was expected a few years ago.
TG: EPA and USDA have an interest in ensuring biofuel policy meets stated goals without causing more harm than good. What criteria should be at the heart of EPA’s decision-making as it goes about implementing the RFS?
SI: I’d like to borrow a term from Jeremy, we need smart policies. There is clearly a lot of optimism in the US and a lot of places about our potential to increase crude oil and natural gas production, that is very positive, but it also feels prudent to also make some investments in other energy sources. So the question is how to do that in a way that we have flexibility, so when I say smart I really mean flexibility. For example we are running into the blend wall in implementing the RFS and there was nothing explicitly written into the statutes that went into effect automatically when we started having those problems.
There is going to be a lot of significant debate over whether EPA has the authority to write down the renewable mandate as apparently they’re going to propose as in these leaked rules. What kinds of smart flexibility does Congress want written into these kinds of volumetric standards to make these policies smarter. Was it Congress’ intent to incent or stretch our fuel system, some would say force in the development of renewable fuels, and something like the E10 blend wall is something we need to work through, or is that something that stops us where we are today.
DG: I think the take home message right now in terms of what is happening with the EPA deliberations is to meet the goals of the RFS there needs to be a balance between what is doable in the short run and also a balance with motivating an expansion and moving forward. And how fast we press the accelerator is a real question we have to answer going forward.