RFS2 – New Opportunities for Farmers?

RFS2 (Renewable Fuel Standard) is the recently updated ruling from EPA that determines how our country will reach the mandated goal of blending 36 billion gallons of renewable fuel into transportation fuel by 2022. RFS specifies the volumes of cellulosic biofuel, biomass-based diesel, advanced biofuel, and total renewable fuel which will be required in our transportation fuels.

EPA provides the background on two models it used to predict number of gallons agriculture will produce per year between now and 2022, commodity price changes, impacts on farm income, U.S. land use changes, international impacts, and impacts on food prices.

These models assume that in order to meet EPA’s required numbers by 2022 that we will produce 15 billion gallons of corn ethanol, 1.7 billion gallons of biodiesel, and 16 billion gallons of cellulosic ethanol. The 16 billion gallons of cellulosic ethanol will consist of 4.9 billion gallons from corn residue or corn cobs and corn stalks; 7.9 billion gallons from switchgrass; 600 million gallons of sugarcane bagasse (remaining pulp after juice extraction); and 100 million gallons from forestry residue.

What it’s worth

EPA suggests that by 2022, corn prices will increase by $0.27 per bushel over a base price of $3.32; soybean prices will increase by $1.02 per bushel above a base price of $9.85 per bushel; switchgrass will go from $20.12 per wet ton to $40.85 per wet ton; corn stalks and corn cobs will be worth $34.39 per wet ton; and sugar cane bagasse should be worth $29.70 per wet ton by 2022.

The good news is that EPA predicts that total U.S. farm income should increase by approximately $13 billion. What I have been unable to determine is whether this $13 billion is eaten up by increased fuel costs and production costs.

Lower exports

To further stoke the food vs. fuel debate, EPA and its modelers believe that we will use 40.5% of corn for ethanol vs. 33.2% which was used in the model. For my friends at the U.S. Grains Council, this is not good news!  EPA predicts “Higher domestic corn prices would lead to lower U.S. exports as the world markets shift to other sources of these products or expand the use of substitute grains.” (There is no mention of grain sorghum or milo as being one of the substitute grains and is, in fact, not even mentioned in the section on agricultural impacts.) EPA predicts that soybean exports will decrease in value by $453 million.

For livestock producers, EPA predicts a higher demand for ethanol production will certainly result in a decrease of corn usage for livestock feed. There is a suggestion that ethanol byproducts will be used to replace a portion of the corn.

In a recent column, I took the University of Michigan (UM) to task for misleading you regarding acres being diverted from conservation to corn production.  Again, if UM had checked with USDA and EPA, it would have found that even EPA is saying “Most of the new corn acres come from a reduction in existing crop acres such as rice, wheat and hay.”

EPA believes there will be an increase in corn acres planted of 3.6 million acres from a base of 78 million acres. To put this in perspective, in 2008 we planted 86 million acres of corn and harvested 78.6 million acres.

EPA believes there will be a decrease by 2022 of 1.4 million acres planted in soybeans which will mean a decrease in our soybean exports. For those of you who want to plant switchgrass, EPA predicts we will need 12.5 million acres.  For those of you inLouisiana, EPA wants to increase sugarcane acres from 100,000 acres to 900,000 acres.

EPA is counting on a 20,000% increase in the number of acres of switchgrass.

Environmental opposition

EPA suggests an increased use in fertilizer in the U.S. which a number of environmental groups do not accept and probably will oppose. These groups want to limit the amounts of nitrogen and phosphorus which run into our waterways.

Notwithstanding these concerns, EPA estimates producers are going to increase nitrogen fertilizer use by 1.5 billion pounds over the 26 billion pounds we presently use.  On phosphorus, producers will increase use by 714 million pounds over the 5.6 billion EPA used as the reference number.

As a result of EPA’s work, the models predict that U.S. food costs will increase by approximately $10 per person per year.

For the next ten days I will be in Brazil and Argentina visiting and meeting with officials as a part the Illinois Agricultural Leadership Foundation Class of 2010 where I serve on the board. It will be interesting to hear the reaction of Brazilian producers and officials to EPA’s RFS2 fuel standard which will certainly impact the sugar cane industry in the U.S. and Brazil.