The White House's Ethanol Compromise Comes To A Head

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Includes: ADM, ANDV, CVRR, DK, FF, GPRE, HFC, MPC, PBF, PEIX, REGI, REX, VLO
by: Tristan R. Brown
Summary

The Trump administration continues to work to finalize the details on the ethanol compromise that it reached between biofuel producers and refiners last week.

The leaked blending volume numbers for 2019 (and 2020 for biomass-based diesel) contain no major surprises, although they do not tell the entire story.

RIN prices have continued to decline as the Trump administration moves forward with its compromise plan.

Reuters reported yesterday that senior officials from the U.S. Environmental Protection Agency [EPA], Department of Energy, and Department of Agriculture will meet this week to finalize the details of the ethanol compromise plan that the Trump administration oversaw earlier this month. The compromise, which was to be unveiled in full last week by the White House, has been delayed while officials work through last-minute "legal and political obstacles," according to Reuters.

As I wrote on May 11, these obstacles are substantial, and it is not surprising that they have yet to be overcome. The White House compromise attempts to keep both ethanol producers and refiners satisfied by simultaneously guaranteeing additional demand for U.S. ethanol while reducing the costs of blending credits, known as Renewable Identification Numbers [RIN], that many refiners incur in order to comply with the U.S. biofuel blending mandate. Under the compromise, ethanol producers would benefit from the sale of 15 vol% blends of ethanol with gasoline year-round (currently E15 sales are restricted during the summer driving season due to pollution concerns) and a reduction in the number of so-called "hardship waivers" awarded by the EPA to refiners. In exchange, the White House would allow exported biofuel to generate RINs (they are unable to do so at present), thereby artificially increasing their supply and reducing their prices.

The removal of the E15 restriction and reduction in the number of hardship waivers awarded are not problematic. The export proposal, on the other hand, is unlikely to pass legal muster: Congress created the ban on RINs being generated by exported biofuels and did not grant the EPA the ability to change this, so only Congress can remove the ban. It is likely that this is the primary "legal and political" obstacle that caused the delay in the compromise's official introduction. It is possible that the Trump administration will illegally discard the ban in the knowledge that it could take years for the courts to issue a final ruling, much as the Obama administration did in 2013 (the courts did not reject that particular maneuver until 2017). The details of how the officials ultimately craft any such modification will, therefore, be very important.

OPIS Biofuels added to the developing story by releasing a leaked copy of the EPA's proposed Renewable Volume Obligation [RVO] for next year:

If the numbers are repeated in the official RVO that is due to be released by the end of the month, then it would appear that EPA Administrator Scott Pruitt has decided not to call Senator Chuck Grassley's (R-IA) bluff. Last week, Mr. Grassley made it clear that Mr. Pruitt's job was on the line in the event that the EPA tried to reduce the number of gallons of biofuels that must be blended with refined fuels next year:

The numbers released by OPIS Biofuels are in-line with the statutory volumetric requirements for 2019. Corn ethanol is capped at 15 billion gallons every year after 2014, while biomass-based diesel cannot be below 1 billion gallons (the leaked number for biomass-based diesel is for 2020, the 2019 volume having been already set last year). If anything, the leaked numbers overshoot on advanced biofuels, which the statute only requires to increase by 500 million gallons from 2018 to 2019 (rather than 590 million gallons).

The numbers would represent yet another missed opportunity for biomass-based diesel production given that U.S. producers have more than 3 billion gallons of capacity. They could easily have been lower given the 1 billion gallon floor, however, and the share prices of producers Renewable Energy Group (REGI) and FutureFuel (FF) moved higher after the leaked RVO numbers came out (see figure).

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FF Price data by YCharts

RIN prices, on the other hand, continued their long-term decline in response, with the price of D5 RINs (advanced biofuels) taking a sharp plunge (see figure). The daily weighted RIN price fell by 8% to $0.34, representing a decline of 67% since last August and the lowest daily price since 2013. This is excellent news for those refiners that have reported the largest RIN expenditures in the past such as Andeavor (ANDV), CVR Refining (CVRR), Delek US Holdings (DK), HollyFrontier (HFC), Marathon Petroleum (MPC), PBF Energy (PBF), and Valero (VLO). All of these refiners have reported high RIN deficits in the past (meaning that they don't blend enough biofuels to meet their individual shares of the blending mandate and must purchase RINs on the open market instead) and lower RIN prices should translate to reduced RIN expenditures for 2018.

Source: EcoEngineers (2018)

The share prices of ethanol producers The Andersons (NASDAQ:ANDE), Archer-Daniels Midland (ADM), Green Plains, Inc. (GPRE), Pacific Ethanol (PEIX), and REX American Resources (REX) were mixed on the news, reflecting what was missing from the OPIS Biofuels report (see figure). Specifically, the released numbers do not show the percentage of biofuels that must be blended with refined fuels next year. As UIUC Professor Scott Irwin was quick to point out, "[t]he real issue is not the RVOs this time but how much will be effectively waived through the small refinery exemptions and possibly through RINs for ethanol exports."

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GPRE Price data by YCharts

It remains to be seen whether or not the EPA will use the aforementioned hardship waivers, which it has distributed liberally to refiners so far this year, to effectively reduce the mandatory blending volume below the statutory requirements. This would also likely be deemed illegal by the courts (waiving the blending requirement for some refining capacity is supposed to result in higher blending requirements for all non-waived capacity), but the Trump administration could again view such a maneuver as a temporary expedient.

If the next week goes according to schedule, with both the details of the White House's ethanol compromise and the EPA's official RVO numbers expected to be released, then investors in refiners and biofuel producers can expect to see the results reflected in the share prices of the affected companies. Uncertainty will remain high until then, the leaked RVO volumes notwithstanding.

Disclosure: I am/we are long FF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.