The US Renewable Fuel Standard and repeal, reform: The Digest’s 5 Minute-Guide

RFS impact on the food sector

Chris Hurt, Professor of Agricultural Economics Purdue University

Several of the drivers of high food commodity prices are expected to moderate in coming months and years. In addition, much of the sector adjustments to higher crop and animal prices has been made. However, biofuels policy could still be an influential factor.

First, overall crop supplies in the U.S. and world are coming into better balance with heightened demand and this will allow farm commodity prices to moderate…The 2013 U.S. crops are expected to be closer to normal after three short production crops…World production capacity has been increasing as well.

Demand growth may slow as well. Chinese demand for soybeans from the U.S. is expected to grow but at a slower rate than in recent years…Corn demand growth for ethanol may be limited due to constraints from the blending wall. [Overall], food inflation could drop back below the core inflation rate as it has already done this year.

How the RFS2 is implemented in 2014 and beyond can have major impacts on the agricultural sector. Agriculture was asked to generate capacity to produce up to 15 billion gallons of conventional ethanol, and to develop that capacity in a short time frame. U.S. Agriculture has largely completed what Congress asked of them with large positive and negative consequences for various sectors. Most of the adjustments have occurred as supply has finally risen to meet the current level of demand and commodity prices are expected to moderate. Crop farmers want to at least maintain current conventional ethanol levels and can, in a few years, increase production to meet the 15 billion gallon mandate if a way can be found around blend wall constraints.

Oilseed production can also increase modestly allowing some modest expansion of biodiesel use, again over time. However, this cannot meet multi-billion gallon mandates without major distortions to segments of food markets. The animals sector and food consumers want to avoid political mandates in an RFS that increase demand for crops at a faster rate than U.S. and world supply can reasonably meet.

In today’s Digest — diversifying the fuel supply; the real problems and immediate relief; and “a way forward?” – all by following the page links below.