Suspension of ethanol-in-gasoline rule wouldn't affect markets very much, Fed banker writes

In the wake of this summer's drought, corn prices skyrocketed, squeezing U.S. grain supplies. This reignited the debate about the Renewable Fuel Standard, which requires a certain percentage of ethanol in gasoline and has expanded the U.S. ethanol industry. The industry has produced so much of the biofuel that it soon will have a surplus. Some believe that temporarily waiving the RFS mandate will reduce ethanol production and reduce corn prices, Nathan Kauffman of the Federal Reserve Bank of Kansas City writes in The Main Street Economist, a publication of the bank. However, he says ethanol production isn't likely to decrease that much, even during a waiver period.

That's because the RFS mandates that ethanol be produced to supply gasoline blends through the next decade. "A temporary waiver would not relieve the pressure on current production to build credits to satisfy future mandates," Kauffman writes. The ethanol industry has become more market-based as production has soared, he continues, and if energy prices rise faster than commodity prices, ethanol profits could increase, raising production regardless of the RFS mandates. Ethanol is also the primary octane enhancer and fuel oxygenater on the market, with few alternatives. "Thus, it is markets, not mandates, that ultimately will determine the scale of ethanol production and its use of scarce corn," Kauffman writes. (Read more)