Livestock producers, along with several national and state elected officials, are calling for a waiver of the Renewable Fuel Standard (RFS), which requires fuel blenders to include a set volume of ethanol in gasoline. But whether or not a waiver would bring lower corn prices depends on a complex set of factors, according to a new report from Purdue University economists.

The RFA always has been controversial, but this year’s drought, which has pushed corn prices 60 percent higher since June, has brought the issue to the forefront.

According to the Purdue researchers who presented their findings in a Webcast sponsored by Farm Foundation Thursday, the impact of a waiver would depend in large part on the flexibility of fuel blenders to adjust. Even without the RFS mandate, several technical and economic factors could prevent them from significantly reducing their ethanol usage, says the report’s lead author, Purdue economist Wally Tyner, PhD. For example, the current standard ethanol/gasoline blends produce 87 octane, versus 84 octane for the same gasoline without ethanol, and blenders might be unwilling to make the necessary adjustments to their processes. Also, blended fuels avoid some seasonal vapor pressure rules regulating the formulation of gasoline. Economically, blenders would not be likely to reduce ethanol use as long as ethanol prices are below those for gasoline, as they are now.

Another influencing factor is that blenders currently are running ahead of the mandated RFS.  This year the RFS mandates oil companies blend 13.2 billion gallons of ethanol with the gasoline they produce. The mandate increases to 13.8 billion gallons in 2013. However, blenders have built up credits known as “renewable identification numbers (RIN) by blending 2.6 billion gallons of ethanol above what was required in previous years. They can carry those credits forward, and count them against the requirements in future years. If blenders decided to use those credits to blend 2 billion fewer gallons of ethanol in a year, corn prices could drop by about 67 cents a bushel without any EPA waiver,” Tyner says.

The researchers conclude that If EPA granted a waiver, and blenders have the have flexibility to adjust their use of ethanol, a small waiver could reduce corn prices around 47 cents a bushel, while a large waiver could reduce it as much as $1.30 a bushel, depending on economic conditions.

Several experts offered comments following the Webcast. Steve Meyer, president of Paragon Economics, pointed out that while a 47-cent reduction in corn prices might sound small, but for livestock producers, a change of that magnitude can affect margins significantly. He also noted that the effect of rising corn prices on food prices for consumers comes about slowly. Fresh beef and poultry prices hit all-time highs in July he says, but the current increases relate to the run-up in corn prices from 2008 to 2010. The impact of the current corn market on food prices is still ahead of us.

Purdue economist Chris Hurt warned that ‘demand destruction” caused by exceptionally high corn prices could create market instability and volatility in the future. If corn users find ways to ration and scale back on corn purchases during a time of tight supplies, a big corn crop could turn the situation upside-down, with supply exceeding demand.

One participant asked Hurt how much of an impact a reduction in corn use for ethanol would have on feed prices, since production of distillers’ grains also would be reduced. Hurt pointed out that when a bushel of corn goes into ethanol production, about two-thirds ends up as ethanol and one-third as distillers’ grains for feed. Shifting that bushel of corn from ethanol to feed use results in a reduction of 18 pounds of distillers’ grains but contributes 56 pounds of corn for feed. And because of the strong relationship between the prices of corn and distillers’ grains, lower corn prices could result in lower prices for distillers’ grains in spite of shorter production.

Read the report or view the Power Point presentation on the Farm Foundation website.