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Takeaway: Bearish for ethanol producers and blenders. Bullish for independent refiners who spend hundreds of millions to buy RINS for compliance.

Ethanol & Refiners: ADM, PEIX, REX,  VLO, GPRE, REGI, REX, MPC, PBF, CVX, CASY, MUSA, ATD.b.TO

The Environmental Protection Agency (EPA) is considering a policy change to the Renewable Fuel Standard (RFS) regulations that would allow biofuel exports to generate credits for use by refiners to comply with the law.

Bloomberg reported the news this week but we have been aware that the Trump Administration and EPA have been considering the policy change for weeks.

Under current regulations, any biofuel that is exported loses its Renewable Identification Number (RIN) credit that is attached to each gallon of fuel. The change in policy would mean that an additional 1.2 billion of gallons of biofuel, mostly ethanol, that were exported in 2016 would now generate additional RINS available to refiners to comply with annual biofuel mandates.

Independent refiners would be big beneficiaries of the change. These refiners, who don’t have biofuel blending facilities and thus are unable to generate RINS, are under great hardship due to high RINS prices. The cost of compliance is hundreds of millions of dollars and for some companies exceed entire labor costs. Layoffs and refiner closings are real possibilities without this regulatory relief.

The 2017 EPA RFS mandate is 15 billion gallons of renewable fuels. Adding more RINS from another 1.2 billion gallons of exported biofuels would send prices of tradable RINS credits crashing. We estimate that RINS prices could see a drop of 30 percent or more.

 Ethanol Exports Policy Change Spells Trouble for High RINS Prices & Relief for Refiners - RINS chart

We believe the White House and EPA support making the policy change to have ethanol exports generate new RINS. Refiners are hoping EPA will make the change in the final 2018 RFS rule due to be released about November 30, 2017. 

However, the policy change may be viewed by agency lawyers as needing its own rulemaking – a process that takes 6-12 months. In that case, EPA would likely issue a proposed rule on ethanol exports about the same time as the final RFS. The proposed rule would be open to a period of public comment and finalized sometime in 2H 2018. But even a proposed rule on the export change would trigger a big drop in RINS prices.

We think there is a 40 percent chance for including the change in the final RFS on November 30 which would be effective immediately. But we think there is a 70 percent likelihood that EPA would do a separate rulemaking and issue a proposed rule about November 30 that would be finalized in 6-12 months.

Why not higher odds?  While we have high confidence that the change will be made, corn state political pressure on the White House will be enormous. President Trump won Iowa in the 2016 general election and has repeatedly expressed his support for ethanol. Ethanol producers and allies had a hastily arranged meeting at the White House after news of the export change and another potential RFS change broke this week. Senator Chuck Grassley (R-Iowa) spoke by phone with President Trump this week on the topic and made some very critical tweets.

 Ethanol Exports Policy Change Spells Trouble for High RINS Prices & Relief for Refiners - Grassley tweet

However, the ethanol exports change puts the renewable fuels industry in a tough position because it doesn’t make sense for them to oppose a provision that incentivizes exports.

The Bipartisan Policy Center issued a 61-page report in December 2014 entitled “Options for Reforming the Renewable Fuel Standard.” One of its recommendations on page 30 was to “allow exports of biofuels to meaningfully contribute to the RINS program.” The reported cited the advantages of allowing exports to generate RINS: “this approach supports more domestic production” and “may provide a better and more steady incentive for domestically produced fuels.” The full report is available here.

Moreover, adding extra RINS from exports does not affect ethanol production. Of course, the real reason the industry and others oppose it is because they enjoy record profits from high RINS prices.

Still, corn state politics is a risk to the policy change.

This has been a tough week for ethanol producer and big traders of RINS credits. On Tuesday, EPA issued a rare “Notice of Data Availability” seeking public comments on potential reductions in renewable fuel volume mandates proposed in a draft rule released earlier this year. 

We believe the notice issued Tuesday is a sign that EPA intends to lower the RFS volume mandates when the final RFS is issued around November 30, 2017.  If lower volumes are finalized, it would lower RINS prices and provide a boost to independent refiners who are paying hundreds of millions of dollars in compliance costs due to high RINS prices. It would also be a headwind for ethanol producers and blenders who are benefitting from higher profits from rising RINS prices.  Click here for our earlier note this week on the EPA Notice.