Stephanie Kelly, Jarrett Renshaw

(Reuters) – The White House will soon announce the quantity of biofuels such as corn-based ethanol it requires that U.S. refiners use in their fuel for the year. This decision will require them to balance consumer inflation with supporting America’s farmers.

As high prices continue to pose a threat to President Joe Biden’s Democratic party, and Farm Belt voters still remain an essential constituency, how the administration balances these competing priorities will play a part in November’s midterm election.

According to two people familiar with the matter, Brian Deese is leading the White House National Economic Council in analyzing numbers to determine if lowering blend mandates for renewable diesel and ethanol will reduce rising fuel and food prices.

According to theory, cutting mandates on ethanol and advanced biofuels (biodiesel) could cut food costs. It would reduce demand for corn, soybeans and other staples that are more difficult since the invasion of Ukraine by Russia. By reducing compliance costs, some oil refiners may be able to reduce pump price pressure by trimming mandates.

However, this would be a rebuke to farmers and the biofuels sector who insist that the mandatory annual blending is essential for their survival.

White House representatives are currently meeting with members of the lobbying group representing major oil and consumer goods companies, including American Bakers Association and American Petroleum Institute, to discuss the possibility of changes.

In the history of the program, I’ve never seen such an interplay of factors potentially affecting the result. Michael McAdams is the president of Advanced Biofuels Association.

Late April saw the White House receive the Environmental Protection Agency’s proposal regarding biofuel volume mandates in 2020-2022. Three sources confirmed to Reuters that the proposal would reduce retroactively the mandates for 2020 and 2021, but increase it again for 2022. The EPA refused to comment.

ETHANOL & HIGH GAS PRICES

In 2005 the U.S. Renewable Fuel Standard was enacted. It requires that refiners blend biofuels such as ethanol in their fuel pool, or purchase credits from those who do. While the program is a boon to states such as Iowa and Nebraska economically, smaller refiners that haven’t invested in blending plants say they are concerned about their ability to purchase credits.

U.S. credits that are tied to ethanol have been trading above $1.60, their highest price since August. However, biomass credits trade for over $1.80, close to the top since June. Since last year, ethanol credits have been trading at historic high levels. They were as low as 8c per unit in the early 2020s, while biomass-based credits are over $1.80 each.

Economists believe that some credit cost is passed to the consumers. This results in higher pump costs. To drive credit costs down, some refiners are urging the White House and union supporters to reduce the mandate for ethanol to 15 billion gallons by 2022.

However, without the need for compliance credits, adding ethanol into the country’s fuel pool could actually lower pump prices by increasing the volume of fuel available using a cheaper substance than regular gasoline.

In response to this dynamic, the White House announced earlier in the year that it would lift a ban on gasoline sales containing higher levels of ethanol.

FOOD Vs FUEL

The vast majority of RFS blending is done with corn-based ethanol. The EPA proposal requires refiners in 2022 to mix 15 billion gallons ethanol with 5.77 billion gallons advanced biofuels.

While ethanol demand remains stagnant over the past few years, there has been a surge in demand for advanced biofuels such as renewable diesel or sustainable aviation fuel, since states like California, Oregon, and other US states have adopted their own renewable fuel mandates. This has increased demand for oilseeds such as soybeans or canola, which serve as biofuel feedstocks. They compete with other crops to provide a finite area for planting.

All things edible oil are used, from chocolates and frying oils to cleaning products and cosmetics.

Robb MacKie (president of the American Bakers Association) first raised concerns with the EPA about the supply and prices of these products last year.

The problem got worse when Russia invaded Ukraine in February.

Nearly a third global wheat production is in Russia, while Ukraine accounts for two-thirds worldwide sunflower oil exports. In Indonesia, palm oil exports were recently prohibited, reducing more than half the world’s supply.

Soybean futures rose more than 20% to $16 per bushel this year, and corn futures gained 30% to $7.90 per bushel.

MacKie declared, “In the light of what are we experiencing, alarm bells are ringing.”