Analysis: White House balances inflation and farmers in new biofuel mandates

May 16 (Reuters) – The White House is expected to announce in coming weeks how much biofuels like corn ethanol that U.S. refiners will have to blend into their fuel this year, a decision that will force it to balance taming consumer inflation against subsidizing the nation’s farmers.

How the administration balances competing priorities could play a role in the November midterm elections, where soaring consumer prices pose a political threat to President Joe Biden’s Democratic Party and Farmbilt voters remain a crucial constituency.

The White House National Economic Council, led by Brian Dees, is pouring in the numbers to gauge whether reducing blending mandates for ethanol and renewable diesel will help curb rising food and fuel prices, according to two sources familiar with the process.

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Reducing mandates for ethanol and advanced biofuels such as biodiesel could theoretically lower food costs by reducing demand for corn, soybeans and other staple crops that have become scarcer since the Russian invasion of Ukraine. Reducing mandates can also relieve pressure on pump prices by reducing blend compliance costs for some oil refineries.

But doing so could anger farmers and the biofuel industry, which insists annual blending mandates are necessary to support their livelihoods.

White House officials are meeting with pressure groups representing the oil and consumer goods giants, including the Food Processing Alliance, the American Bakers Association, the American Petroleum Institute and the Renewable Fuels Association, as they weigh potential changes.

“Never in the history of the program have I seen such a confluence of issues potentially affecting the outcome. If there was a perfect storm, this is it,” said Michael McAdams, president of the Advanced Biofuels Consortium.

The Environmental Protection Agency sent its proposal for biofuel volume mandates for the years 2020 to 2022 to the White House for final review in late April. Three sources told Reuters the proposal would retroactively reduce mandates for 2020 and 2021 but boost it again in 2022. The EPA declined to comment.

Ethanol and rising gas prices

The US renewable fuel standard, enacted in 2005, requires refiners to mix biofuels such as ethanol into their fuel complex or to purchase credits from refineries that do so. The program has been an economic boon for states like Iowa and Nebraska, but smaller refineries that haven’t invested in blending facilities say the cost of buying credits threatens their plants.

US ethanol-related credits are trading at over $1.60 each, the highest level since August, while biomass-based credits are trading at over $1.80 each, near the highest level since June. Ethanol stocks, which were trading as low as 8 cents a piece in early 2020, have been at historically higher levels since last year.

Economists say that part of the cost of credits is passed on to consumers, which leads to higher pump prices. Some refiners and their union backers are encouraging the White House to cut the ethanol mandate to less than 15 billion gallons in 2022 to cut credit costs.

Without the cost of compliance credits, however, adding ethanol to the nation’s fuel tank could actually reduce pump prices, by expanding the total volume of fuel available with a cheaper substance than straight gasoline.

The White House earlier this year capitalized on this dynamic by announcing the lifting of the ban on summer sales of the high-ethanol blend gasoline, called E15.

food for fuel

Corn-based ethanol accounts for the vast majority of blends under the RFS. In 2022, the EPA’s proposal would require refineries to mix 15 billion gallons of ethanol and 5.77 billion gallons of advanced biofuels.

In recent years, while demand for ethanol has remained stagnant, demand for advanced biofuels like renewable diesel and sustainable aviation fuels has soared as states like California and Oregon adopt their own renewable fuel mandates. This has swelled the demand for oilseeds such as soybean and canola that serve as biofuel feedstocks and compete with other food crops for limited growing area.

Edible oils are used in everything from cakes, chocolates, and frying fats to cosmetics, soaps, and cleaning products.

Rob Mackie, president of the American Bakers Association, which includes companies such as Kroger Co (KR.N) and The Tasty Baking Company, the first to raise supply and pricing concerns for these products with the Environmental Protection Agency last year, and demanded that blending levels be brought back to 2020 levels.

Then the Russian invasion of Ukraine in February exacerbated the problem.

Russia and Ukraine account for nearly a third of global wheat and barley production, and two-thirds of global exports of sunflower oil used in cooking. Indonesia also recently banned the export of palm oil, cutting off more than half of the world’s supply.

Soybean futures are up more than 20% so far this year to more than $16 a bushel, while corn futures are up about 30% to more than $7.90 a bushel.

“In light of what we’re going through, alarm bells are ringing,” Mackey said.

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(Reporting by Garrett Renshaw and Stephanie Kelly) Editing by Heather Timmons, Richard Valdemanis and Margarita Choi

Our criteria: Thomson Reuters Trust Principles.

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