# FAPRI

- MU Biofuel Baseline

March 20 13

FAPRI

- MU Report #02

- 13

Providing objective analysis for more than 25 yearsPublished by the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri

(MU), 101 Park DeVille Drive, Suite E; Columbia, MO 65203. FAPRI

– MU is part of the Division of Applied Social Sciences (DASS) in the College of Agricultu re, Food and Natural Resources (CAFNR).
http://www.fapri.missouri.edu
This material is based upon work supported by the U.S. Department of Agriculture, under Agreement No. 58

- 0111

- 12

- 003 and the National Institute of Food and Agriculture, U.S. Department of Agriculture, under Agreement No. 2008

- 38420

- 18747.
Any opinion, findings, conclusions, or recommendations expressed in this publication are those of the authors and do not necessarily ref lect the view of the U.S. Department of Agriculture nor the University of Missouri

. This report was prepared by Jarrett Whistance ( jwxbb@mail.missouri.edu ) and Wyatt Thompson ( thompsonw@missouri.edu ) at FAPRI

- MU.
The authors would like to thank participants in a workshop reviewing a preliminary version of these estimates in Washington , DC, in December 2012 and in St. Louis, Missouri, in January 2013. Any remaining errors are those of the authors.
Permission is granted to reproduce this information with appropri ate attribution to the authors and FAPRI

– MU.

The University of Missouri

– Columbia does not discriminate on the basis of race, color, religion, national origin, sex, sexual orientation, age, disability or status as a qualified protected veteran. For more information, call Human Resour ce Services at 573

- 882

- 4256 or the US Department of Education, Office of Civil Right s.1 

## Executive Summary

This report takes a closer look at the biofuels portion of the U.S. Agricultural and Biofuels Baseline released by the Food and Agricultural Policy Res earch Institute at the University of Missouri (FAPRI

- MU). The
FAPRI

- MU baseline is a ten

- year projection of market prices and quantities using information available in January 2013. The relevant markets in this report include those for ethanol, biodiesel, Renewable Identification Numbers (RINs), and biofuel feedstocks such as corn and soybeans. As evidenced by sharply higher conventional RIN prices, t he results indicate the blend wall quickly becomes a major issue that persists throughout the projection period . Although se veral factors contribute to the result, chief among them appears to be declining motor gasoline consumption as oil prices rise and cars become
more fuel efficient over time

. Less overall fuel use means less ethanol can be used in fuel wi th 10% ethanol (E10). In order to meet the increasing Renewable Fuel Standard (RFS2) requirements, more ethanol must be consumed
in mid

- and high

- level ethanol blended fuels (i.e. E15 and E85). Ethanol prices fall dramatically relative to gasoline in order to encourage infrastructure development and consumer adoption for those fuels. Cellulosic ethanol production is projected to grow at a modest rate but continues to remain well below the levels intended by RFS2.The baseline assumes the Environmental Protection Agency (EPA) continues to reduce the RFS2 requirement for cellulosic biofue ls to the level of production, but also reduces the broader advanced and overall RFS2 requirements beginning in 2014. Th e implication is that the EPA reduces the overall biofuel requirement by up to the same amount as the cellulosic shortfall, whereas the EPA could opt to leave the broader mandates unchanged so that the cellulosic shortfall must be made up by greater use of other biofuels.
Two

- way ethanol trade with Brazil continues throughout the projection period. Imported sugarcane
ethanol from Brazil re mains the primary way to meet the RFS2 requirement for advanced biofuels. As the mandate grows, ethanol imports rise accordingly. Higher imports of sugarcane ethanol leave open the possibility for greater exports of corn e thanol. Biodiesel production is projected to exp and beyond the RFS2 requirements , which are assumed to remain steady at the 2013 level of 1.28 billion gallons. In the baseline, b iodiesel competes with sugarcane ethanol imports from Brazil to help fill the RFS2 mandate for advanced biofue ls as shown by the convergence of b iodiesel and advanced RIN prices over the course of the projection period. The results also reflect a shift in the composition of biodiesel feedstocks slightly away from soybean oil and toward other oils, including corn o il. Non

- food grade corn oil becomes increasingly available for both biodiesel and feed uses as more dry

- mill ethanol producers extract corn oil from distillers grains. Baseline results presented in this report are averages of many possible market outcomes given uncertainty about petroleum prices, crop yields, and other factors. The underlying ranges of some quantities and prices, including RIN prices, a re found to be sensitive to ma rk et conditions.2 

## Overview

Recently, the Food and Agricultural Policy Research Institute at the University of Missouri (FAPRI

- MU) released its annual baseline projections for agricultural and biofuel markets. 1 The baseline was prepared in January 2013 according to available market information at the time. Policy assumptions generally follow those of the Congressional Budget Office (CBO) its baseline projections , namely that current policy continues over the 10

- year projection period

. The retroactive and one

- year extension of the $1.00/gallon biodiesel blender credit and the

one

- year extension of the $ 1.01/gallon second

- generation biofuel producer credit were both accounted for in the
baseline. The baseline assumes b oth of those tax credits expire , as legislated, at the end of 2013. Macroeconomic assumptions are based on projections by IHS Global Insight in January 201 3. As in the earlier report, the results presented here are the average of 500 alternative outcomes based on different assumptions regarding weather, oil prices and other factors. Prices, quantities and values in any individual outcome may be much higher o r lower than the averages that are presented.

The purpose of this report is to provide a more in

- depth loo k at the biofuel market results. In addition to the biofuel results in the previous release, this report covers a detailed look at how we assume th e Environmental Protection Agency (EPA) use s its authority to reduce the cellulosic and, by extension, the advanced and overall Renewable Fuel Standard (RFS2) requirements. This report also includes estimates of Renewable Identification Number (RIN) availability, RIN values, and overall RFS2 compliance costs.

Some of the key highlights include:

1) The results d epend, in large part, on our waiver implementation assumption. Each year of RFS2 so
far , the EPA has waived , or reduced, the cellulosic RFS2 requirement from the legislated level to a level
the EPA estimates to be obtainable

. At the same time, the EPA has left the broader advanced and overall RFS2 requirements unchanged

. The baseline assumes a pace of cellulosic biofuel technology growth that falls short of the RFS2 targets, and that the EPA continues to waive the cellulosic mandate to the level of actual produc tion . However , we assume the EPA begins waiving the advanced and overall mandates in
2014. The biomass

- based diesel requirement remains unaffected, and we assume it is held steady at 1.28 billion gallons in the years beyond 2013

.

1 See www.fapri.missouri.edu . Note: Differences occur between this report and FAPRI

- MU # 0 1

- 13 as we have discovered, and corrected, an error in our handling of E15 use and its implications for the potential E10 market. The effects of this correcti o n on market prices and quantities are small.3

2) The “blend wall” appear s more pressing than in previous baselines. Declining motor gasoline consumption in the medium term makes it more difficult to meet the overall RFS2 requirement by further limiting the amount of ethanol that can be consumed in low

- level (E10) ethanol blends . Assuming the RFS2 continues to be enforced, more ethanol must be consumed in mid

- level (E15) and high

- level (E85)
blends to overcome the blend wall.

3) The effective retail price of ethanol falls well below the energy equivalent price relative to unleaded gasoline

. Ethanol prices below energy equivalence, an ethanol

- gasoline price ratio of about two

- thirds,

encourage wider adoption of mid

- and high

- level blends. A key uncertainty is the length of time such low retail ethanol prices would need to persist. I n these projections, the prices remain low to stimulate additional E15 and E85 use each year.

4) RIN prices rise sharply before holding steady through the projection period a s the blend wall becomes more pressing and RFS2 requ irements become harder to meet. Conventional RINs rise to around $0.80 per RIN. Biodiesel and ad vanced RINs converge around $1.40 per RIN. T heir behavior
indicates that biodiesel is competitive with sugarcane ethanol imports from Brazil as a way of meeting the
RFS2 mandate for advanced biofuels. The overall cost of complying with the RFS2 rises along with RIN prices, and those costs are assumed to be passed on to all motor fuel consumers. In light of recent market developments, our conventional RIN price projections for 2012/13 are likel y to be too low, but concerns about the blend wall are playing out in the market much as we would anticipate

.

5) Biodiesel use expands beyond RFS2 requirements and might compet e in the broader advanced requirement. Soybean oil is the largest feedstock for bi odiesel production throughout the projection period . Corn oil becomes much more popular than in the past as more dry

- mill ethanol producers extract corn oil and increase its availability as a biodiesel feedstock. The first small levels of cellulosic diesel production appear in this baseline, but all of it is used to meet the cellulosic biofuel requirement rather
than the biomass

- based diesel requirement.

6) RIN p rices and other variables are sensitive to conditions. A ll t he data presented here are averages of
the 500 simulations. Each simulation is distinguished by its own assumption about petroleum price, crop yield variations, and other factors. The RIN price ranges are wide in this baseline, with many outcomes represent ed, including biodiesel use exceeding its mandate to help meet the broader advanced mandate, sugarcane ethanol competing with corn ethanol for the overall mandate, and the overall mandate not binding with conventional RIN prices falling to zero in some instances

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