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August 19, 2008
'Food vs. Fuel' Hearing Comes to America's Heartland

The "food versus fuel" debate over the role that biofuels have played in the recent run-up of food costs got another chance in the spotlight this morning, this time in the pro-ethanol heartland, where the Senate Agriculture Committee chose to hold a field hearing on the topic.

"I'll admit corn-based ethanol's not perfect, but it's been blamed for practically every problem under the sun. What's next? Summer colds? Computer viruses? Bad hair days?," asked Sen. Ben Nelson (D-Neb.), who along with Committee Chairman Tom Harkin (D-Iowa), hosted the field hearing at the University of Nebraska, Omaha.
  
"The focus here should be on the big picture: ethanol is the only domestically-produced alternative to oil-based transportation fuels. It is helping us in a big way to stretch the gasoline supply, save American consumers money at the pump, create jobs in rural communities, improve our rural and national economy--and to top it off--help wean us off imported oil," Nelson said. "To ethanol's critics I ask, 'Why farm out our energy needs to foreign suppliers when we're producing so much clean-burning renewable fuel on our own farms?'"
  
While Nelson and several others spoke in support of biofuels and congressional policies to promote its use--namely the expanded renewable fuels standard (RFS)--there were at least two testifying who cited concerns with the growing use of food-based biofuels.
  
"Earlier this summer, corn reached $7 per bushel. However, it has recently dropped over $2 per bushel in a short time frame. That rapid increase and decrease has resulted in tremendous stress amongst farmers, lenders, grain merchandisers, consumers and others. To say this year has been a wild rodeo ride in agriculture is an understatement," said Iowa Pork Producers Association President Dave Moody, according to a copy of his prepared
testimony. He urged Congress to "take a giant step forward by investing in projects and policies which will more efficiently produce food, feed and fuel simultaneously."
  
Similar comments came from Bill Lapp, principal of Advanced Economic Solutions. "Commodities by their nature are volatile, but until recently, the main driver of volatility has been weather and spikes in grain prices were short-lived and rarely passed on to consumers," he said. "What we have seen in the past year has been an artificial market force--ethanol
policies--driving a sustained increase in the price of grains. These price increases are now being absorbed by consumers as demonstrated by the steady upward trend of food price inflation," he added.
  
"While the recent decline in the price of corn and other commodities is a welcome development for end-users, we should not take too much comfort in the current situation," Lapp warned. Historically, U.S. Department of Agriculture corn crop projections are adjusted up or down an average 6.6% between the August forecast and the final estimate, he noted. "The need for more acreage will be a significant driver of the price of corn and other crops in the coming months (and perhaps years)," he added. More acreage needs to be planted in 2009 and beyond to meet the incremental RFS mandates, he said. For example, corn acreage will need to increase from 87.3 million to 93 million acres next year, he noted.
  
As an example of how little corn affects food prices--and how much more it is driven by oil prices--biofuel advocates have pointed out that a standard box of corn flakes contains approximately 10 ounces of corn, containing less than a dime's worth of corn.
  
"In 2007/08, USDA estimated that 192 million bushels of corn were used in the production
of all cereal--this represents 1.8% of total domestic use of corn and is equal to just 0.1
pounds of corn per person per day," said Lapp. "By contrast, corn use in the production of livestock, dairy and eggs totaled 6.05 billion bushels--representing 58% of total domestic
corn used in 2007/08 and equal to 3.1 pounds of corn per person per day.  While it may be popular to discuss how little higher corn prices impact a box of corn flakes, the impact of higher corn prices upon livestock, dairy and eggs is 31 times more important to U.S. consumers," he added.
  
Others testifying at today's field hearing included Dr. Bruce Babcock, professor of Economics and director, Center for Agricultural and Rural Development at Iowa State University, Dean Oestreich, chairman of Pioneer Hi- Bred and vice president of DuPont Agriculture and Nutrition and Jeff Lautt, executive vice president, POET.

August 12, 2008
EPA Issues Guidance for Future RFS Waiver Requests

Perhaps in anticipation of more renewable fuels standard (RFS) waiver requests (RFS) coming down the pike, U.S. EPA issued guidance yesterday on what criteria future the waivers should have.
  
In his late-April request, Texas Gov. Rick Perry (R) asked for a nationwide, one-year waiver of half of the corn-based requirement under the RFS, citing severe economic harm to the livestock industry and to consumers as a result of rising food prices.
  
However, EPA ruled yesterday that the waiver request "did not meet the criteria in the law." The agency noted that "[c]urrent law authorizes EPA to waive the national RFS if the agency determines that the mandated biofuel volumes would cause 'severe harm' to the economy or the environment. The agency recognizes that high commodity prices are having economic impacts, but EPA's extensive analysis of Texas' request found no compelling evidence that
the RFS mandate is causing severe economic harm during the time period specified by Texas," EPA noted.
  
In the last several pages of EPA's lengthy Federal Register notice, outlining the waiver denial, the agency included a section entitled, "Guidance on Future Requests for Waivers." The guidance provides information on what the statutes are for granting a waiver, using the Texas request as an example for the "dos and don'ts." However, EPA warned that its guidance is not a rule and therefore not binding on the public or the agency.
  
For 2008, only a governor can request an RFS waiver, however, beginning in 2009, "any person subject to the requirements" of the RFS can file a request, which means gasoline refiners and importers, as well as renewable fuel producers and importers, EPA noted.
  
Under the statutes, EPA can approve a waiver for one year or less, unless renewed by the Administrator. "EPA expects that applicants would state the requested start date and duration of the waiver, with waiver applications received generally at least six months before the requested start date, and to the extent that applications cannot be submitted in such timeframe, an application should include an explanation why such expectation could not be
met," EPA noted. The agency said it expects applicants to notify the agency at least three months before the waiver expires if a renewal is needed, the agency said.
  
However, while the statute allows for a public notice and comment period as part of a waiver request, they aren't required, EPA explained. "While EPA always has the discretion to proceed through public notice and comment prior to acting on a waiver request, we believe that there could well be circumstances where it is appropriate for EPA to deny a petition without notice and opportunity for comment. For example, petitions that clearly do not contain information and analysis of a type and quality sufficient to support a grant of a waiver may not justify public consideration prior to issuance of a denial by EPA," the notice said.
  
Additionally, EPA expects any future waiver requests to "provide information and analyses that address what is the impact of implementation of the RFS, and what is the nature and degree of harm associated with the impact of the RFS."
  
In the future, EPA said it will review waiver requests by first determining whether to proceed with public notice. "Where an applicant does not address the relevant issues or does not provide adequate evidence to support their claims, EPA may decide to deny the request without notice and comment," the agency noted.
  
"In this case, the initial submission by the state of Texas provided little analytical or evidentiary basis for their request," however EPA proceeded through a notice and comment process because this was the first such request and the agency had issued no prior guidance on submitting a waiver, the agency said.
  
The full, 57-page Federal Register notice outlining the waiver decision can be viewed at www.epa.gov/otaq/renewablefuels/decision.pdf.
  
Several sources OPIS spoke after the decision yesterday said they believe there will be other states filing similar waiver requests, but said it's too early to tell how which ones or how many would do so.
  
In a statement yesterday responding to the waiver denial, the National Cattlemen's Beef Association (NCBA) said it plans to "encourage other states to file for waivers from the RFS." However, there are no specific states the association is eyeing, an NCBA spokeswoman
told OPIS.
  
In May, Connecticut Gov. Jodi Rell (R) said she was interested in submitting a similar RFS waiver, but preferred to go through legislative and congressional means. A spokesman for Rell told OPIS yesterday that appears to still be the case, although the governor is now focused on efforts to lift the 54 cts/gal ethanol import tariff.
  
Speaking on a conference call yesterday after the waiver denial, Scott Faber with the Grocery Manufacturers Association said his group will continue to work "with the Congress and the next administration to restructure and revisit all of our food-to-fuel policies, including our mandates, tax credits and tariffs. We are in regular conversation with many governors who are
concerned that we are diverting this year one-third of our corn crop from our food and feed supplies to our fuel supplies, and who are even more concerned that we will be diverting more than 40% of our corn crop and up to 30% of our vegetable oils to our fuel supplies in the coming years," he added.

August 7, 2008
EPA Denies Texas RFS Waiver Request

In a decision that surprised few, U.S. EPA this afternoon denied the temporary, nationwide waiver request for the renewable fuels standard (RFS) that Texas Gov. Rick Perry (R) had lodged with the agency.

In his late-April request, Perry asked for a nationwide, one-year waiver of half of the corn-based requirement under the RFS, citing severe economic harm to the livestock industry and to consumers as a result of rising food prices. Under the RFS, 9 billion gallons of corn-based ethanol are required this year.

The comment period on Perry's request yielded more than 15,000 submissions. With such a large response, EPA said it needed more time on its decision and last month, postponed an announcement until "early August."

"After reviewing the facts, it was clear this request did not meet the criteria in the law," EPA Administrator Stephen Johnson said this afternoon, noting the waiver request was for
Sept. 1, 2008 - Aug. 31, 2009.

"Current law authorizes EPA to waive the national RFS if the agency determines that the mandated biofuel volumes would cause 'severe harm' to the economy or the environment. The agency recognizes that high commodity prices are having economic impacts, but EPA's extensive analysis of Texas' request found no compelling evidence that the RFS mandate is causing severe economic harm during the time period specified by Texas," EPA noted.

After consulting closely with U.S. DOE and USDA staff and examining the impact that a waiver would have on ethanol use, as well as corn, fuel, feed and renewable identification number prices, "the research found that the RFS mandate is not causing severe economic harm," Johnson reiterated on a teleconference with reporters.

"We acknowledge that as part of our assessment, there is an increase because of biofuel production in feed prices. ... However, is that the result of the RFS mandate? Our conclusion is no. And second, are those price increases meeting the statutory requirements of 'severe harm to the economy?' Our answer and conclusion is no," Johnson added.

Johnson called Perry shortly before the teleconference call to inform the governor of
EPA's decision.

In a press release response, Perry said he was "greatly disappointed with the EPA's inability to look past the good intentions of this policy to see the significant harm it is doing to farmers, ranchers and American households. For the EPA to assert that this federal mandate is not affecting food prices not only goes against common sense, but every American's grocery bill," the release noted.

"Congress specifically created an emergency waiver provision for situations like these and EPA refuses to implement it," Perry added.

EPA's denial of the waiver request had been expected. Analysts had been saying the waiver made little sense, based on a number of factors, including the recent drop in corn prices,
the improved outlook for the upcoming corn crop and the continued public policy support
for ethanol.

"It has been our belief that the Texas waiver was never more than a gesture, since we are blending well above RFS levels today," said Soleil Securities Analyst Ian Horowitz in a note to clients this morning. "Dropping the floor on a policy you're already exceeding would do very little to quell demand for the product," he noted.

"The reality is that nothing will change; however, there will be relief for the perception that the U.S. ethanol policy could be changed," added BMO Capital Markets Analyst Ken Zaslow, in a note to clients.

Reaction to the denial came pouring in shortly after today's teleconference. Ethanol groups, such as the American Coalition for Ethanol and the Renewable Fuels Association, praised the EPA's decision.

Meanwhile, food groups -- which had launched a massive PR effort several months ago to inform the public and policymakers that biofuels were having an unintended effect on food prices -- were disappointed with the news.

U.S. House Energy and Commerce Ranking Member Joe Barton (R-Texas), who along with other lawmakers submitted comments in support of Texas' waiver request to EPA, also said he was unhappy with today's decision. "In the span of a year, the price of a dozen eggs rose by 35%, a gallon of milk by 23% and a loaf of bread by 16%. Fuel and fertilizer prices are making it harder for family farms to survive from one season to the next and the cost of the RFS mandate is now measured in billions of dollars. Denying the waiver will do nothing to help Texas families struggling to meet their budgets," he added.

Proving the point that many thought today's denial was a foregone conclusion, at least one group issued a press release about 10 minutes before the 1 p.m. EST conference call to praise EPA for its denial decision.

August 7, 2008
BP Pledges $90 Million for Cellulosic Ethanol Joint Venture With Verenium

In its second foray into next generation biofuels, oil company BP announced this morning it is teaming up with cellulosic developer Verenium for a joint venture to accelerate the commercialization of the fuel.

Under the initial phase of the strategic alliance, BP is providing $90 million over the next 18 months for rights to current and future technology held within the partnership.

"BP is very pleased to be entering this important relationship with Verenium. We believe energy crops like sugar cane, miscanthus and energy cane are the best feedstocks to deliver economic, sustainable and scaleable biofuels to the world," said Sue Ellerbusch, president
of BP Biofuels North America. "This deal puts us at the front of the cellulosic biofuels game," she added.

According to the joint press release, the companies "have formed a Special Purpose Entity (SPE) that is equally owned by BP and Verenium, will license existing intellectual property from each company and own jointly-developed intellectual property in the field of cellulosic ethanol production. All intellectual property owned prior to the formation of the SPE will be retained by each respective company. Further, the SPE will serve as the licensing entity to enable all cellulosic ethanol production projects," the joint press release noted.

Verenium announced in May it had begun the commissioning phase of its 1.4-million gal/yr demonstration-scale cellulosic ethanol plant in Jennings, La., which aims to produce the fuel from bagasse and wood chips. Additionally, the company previously announced plans to build a 25-million-30-million gal/yr commercial cellulosic ethanol plant somewhere in the Southeast, although no specific location has been revealed. The company expects to begin construction on that facility by the middle of 2009.

Among other financial specifics of the initial phase of the BP/Verenium project, according to the press release:

--$45 million, payable in three installments over the next twelve months, for broad access
to Verenium's cellulosic ethanol technology platform, production facilities and employee scientific knowledge and expertise. At closing, Verenium will receive the first $24.5 million
of this amount;

--$2.5 million per month to co-fund Verenium's various scientific and technical initiatives within the cellulosic ethanol field. The companies' joint efforts in the field will be directed by a Joint Development Agreement, the initial term of which is 18 months.

Beyond the initial 18-month joint venture, the companies expect to negotiate a second phase. "While the primary and initial focus of the joint venture will be on facilities jointly owned by BP and Verenium in the United States, the SPE technologies may also be licensable to third-party commercial projects," the companies noted.

This is BP's second move into the next generation of biofuels. In June 2006, BP announced that it and DuPont were teaming up to develop and market biobutanol, converting an ethanol fermentation facility into the fuel.

August 5, 2008
EPA Tells Retailers to Follow Ethanol Laws Not Economics

Aware that ethanol economics have created incentive for stations to sell more E20 and E30 blends, the EPA has reminded retailers that they could face hefty fines if they sell gasoline blended with more than 10% ethanol for use in motor vehicles and non-road engines.
  
The Clean Air Act strictly prohibits this type of use.
  
The fuel could damage, and cause increased emissions in, gasoline-only vehicles and engines, said EPA in a July 31 letter to refiner group API.
  
Blends of up to 85% ethanol are legal but only in flex-fuel vehicles and engines, it says.
  
EPA sent the letter in response to a number of inquiries from parties wanting to know if the higher-than-10% blends are allowed for on- and off-road engines.
  
"Due to the price of ethanol in recent months, and due to the lower energy content of ethanol, there is an incentive for stations to sell E-20, E-30, and the concern is that they may sell it for use in gasoline-only vehicles as well as flex-fuel vehicles," said an EPA source.
  
To ensure proper fueling by the public, EPA suggests that retail stations that sell to the flex-fuel motorist affix labels in a conspicuous manner stating that any other use is illegal and may cause engine damage.
  
Precautions to restrict pump access to flex fuel such as a card-lock system may also reduce the likelihood of violations, says EPA. Setting pumps apart may also help.

© 2008 OPIS