US fuel mandates no salve for farm trade losses

Higher US biofuel blending mandates cannot make up for lost export trade opportunities, according to farm groups caught in the crossfire of the country's trade war with China.

US independent refiners show little concern that the administration will blunt sharply lower exports to China by pressuring more renewable fuels into the domestic transportation supply. While renewables groups continue to seek rising targets and stricter enforcement of US fuel blending mandates, the scale of renewable volume obligations (RVO) imposed on refiners and fuel importers each year falls well short of the agricultural commodities shipped to China.

"It would take a heck of an RVO number, on the biodiesel side, to even put a dent or a ripple in the pond to make up for China," said Rob Shaffer, an Illinois farmer and boardmember of the American Soybean Association and National Biodiesel Board. "We would appreciate any increase, but it just takes so much to make up for China."

President Donald Trump's decision to hike import tariffs on Chinese goods this month drew expected countermeasures from Beijing. Tariffs on certain corn and soy products will rise by 25pc on 1 June, intensifying policies that have priced soy farmers especially out of a market that took decades to cultivate. US farmers exported 22.6mn t of soybeans to China during the 2016 crop year, according to US Department of Agriculture (USDA) data. The US sent 23.8mn t to China between October 2017 and March of 2018. That fell to 5.2mn bt over the same period ending in March 2019. US farmers meanwhile start the season with a record 995mn bushel inventory to clear while placing this year's crop.

The administration has turned to biofuel mandates before to curry favor — or simply patience — from agriculture producers. Trump announced in an Iowa campaign stop last fall that he would direct the Environmental Protection Agency (EPA) to allow the year-round sale of higher-ethanol blends of gasoline, called E15, currently blocked by clean air laws from sale during the peak summer driving months. EPA this month continued to race to finish that rule before the formal 1 June start of the summer driving season. Proponents of that change have estimated that the change could add 350mn of ethanol blending by 2021 — roughly 125mn bushels of corn demand. EPA paired them to changes to the trading market of credits used to prove compliance with federal mandates unpopular with integrated refiners and blending operations.

Summer fuel changes would have almost no effect on soy-based biodiesel consumption. Biodiesel producers instead face ongoing risk from EPA waivers slashing federal renewables mandates and sluggish attention to expired tax incentives to blend the fuel.

The blender tax credit (BTC), a $1/USG incentive to add biodiesel to conventional diesel, expired at the end of 2017. EPA has cited the BTC as the most influential driver of US biodiesel blending. Congress has repeatedly extended the credit after allowing it to expire, but has allowed the current limbo to stretch to 17 months. Sources familiar with negotiations around the tax extension do not expect earnest talks in the US House of Representatives, where tax legislation must begin, before July.

The industry may not know the future of the credit before fall. The extended uncertainty has cut blending demand and biodiesel production, adding another headwind for soybean consumption.

The DC Circuit Court of Appeals last week rejected a request to block EPA from exempting more small refineries from fuel blending requirements. The 36 waivers the agency issued for the previous compliance year effectively cut total mandates by almost 10pc. EPA was considering 39 applications for the next compliance year, according to the latest disclosure issued last week.

Previous waiver recipients expected the EPA to continue issuing the exemptions despite the court challenges.

"We expect the [exemptions] to continue to be granted, consistent with the recent practice under the Trump administration," HollyFrontier chief executive George Damiris told investors.