Markets, Not Mandates, Shape Ethanol Production - Issue 5, 2012 Federal Reserve Bank of Kansas City

By Nathan Kauffman, Economist

The 2012 drought has reignited the food versus fuel debate. After cutting U.S. corn production below recent years' consumption, the drought sparked a U.S. grain shortage and sent global food prices soaring. As the grain shortage intensified, pressure to relieve the shortage by easing ethanol mandates mounted. Escalating ethanol mandates under the Renewable Fuel Standard (RFS), which fueled the expansion of the U.S. ethanol industry, will soon exceed the amount of ethanol than can be used in current U.S. gasoline blends. Some industry participants believe that a waiver of the mandate has the potential to reduce ethanol production and relieve high corn prices.

However, ethanol production may not decline significantly, even if the mandates are waived temporarily, a request the EPA recently denied for the 2013 mandate. The RFS mandates stipulate ethanol blending for the next decade. A temporary waiver would not relieve the pressure on current production to build credits to satisfy future mandates.

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