Week In Review: Ethanol and Trade
As President Donald Trump heads to Canada to meet with leaders of the world’s biggest economies, then to Singapore to possibly declare an end to the Korean War, farmers in the Midwest are left scratching their heads over a week that seemed momentous for agriculture. But was it really?
It was for ethanol.
Early this week President Trump rejected a deal that would have allowed year-round blending of 15% ethanol (E15) in exchange for allowing ethanol exports to count against requirements for oil refiners to blend ethanol.
“Unfortunately, E15 wouldn’t have been enough to offset the damage caused by allowing biofuel exports to count toward the annual blending quotas,” Senator Charles Grassley (R-IA) told reporters in a conference call on Wednesday.
Although E15 sales are rising rapidly in some states, the higher ethanol blend is sold in only about 1% of the nation’s gas stations. Ethanol exports set a record of nearly 1.4 billion gallons last year and may be on track to break another record. But other nations say that giving blending credits for exports would be an illegal export subsidy. The critics include Canada, the second-largest buyer of U.S. ethanol after Brazil.
“A WTO (World Trade Organization) challenge was coming, had that gone through,” Hart, an agricultural economist at Iowa State University, told Agriculture.com.
Allowing exports to count toward blending quotas would also have taken pressure off domestic oil companies to use ethanol, significantly lowering blending below the 15-billion-gallon-a-year mandate under the nation’s Renewable Fuel Standard. That’s something that EPA Administrator Scott Pruitt has already done by granting hardship waivers from blending requirements to large, profitable refiners. Grassley said domestic demand under the RFS is now down to 13.8 billion gallons.
Grassley said he’ll continue to fight for year-round sales of E15 being allowed by EPA, although getting Pruitt to push that through the agency “is going to be very difficult.”
He’ll also push to restore the 15-billion-gallon RFS, getting the 2019 blending mandate “nailed down” and making sure “that any waivers are not going to detract from it.”
“That’s just maintaining the status quo, more or less,” he said.
Grassley has help. Ethanol trade groups, the National Corn Growers Association, and National Farmers Union have filed a lawsuit challenging the blending waivers that Pruitt secretly granted to large refiners.
University of Illinois agricultural economist Scott Irwin recently told Agriculture.com that he thinks such efforts will ultimately succeed. “Pruitt's fun and games will get wrung out of the system. It may take a few years through the courts, but that eventually will happen.”
Meanwhile, trade war saber rattling has started to draw blood.
Just as the ethanol industry dodged a bullet in Washington, Mexico fired another one, imposing a 10% tariff on unprocessed pork that rises to 20% on July 5. It follows China’s imposition of a 25% tariff on U.S. pork in April.
“China went from fourth on our export list down to about seventh because of tariffs being put on them,” economist Hart says.
The newest tariff from Mexico is in retaliation for the Trump administration’s imposition of tariffs on steel and aluminum.
Tariffs on pork are already hurting prices paid to farmers. But the threats of other tariffs are less clear.
China has threatened a 25% tariff on soybeans, but prices for that commodity have so far fared better than pork.
“The worst that it got was that first day China announced soybeans were on the list,” Hart says. “Within an hour we saw significant recovery.”
That’s partly because in the real world of farmers’ fields, weather threatens yields from South America to Texas and Oklahoma.
“You’ve got weather and international supply propping prices up,” Hart says. “Every day I can give you a positive news story or a negative news story to balance out the markets.”
Still, Hart believes farmers should take these new tariff threats seriously.
“You want to pay attention. If these tariffs go into effect, there’s going to be a pricing impact,” he says.
Hart has studied the effect of tariffs imposed on some commodities, including grain sorghum, when tariffs were imposed in the past. Generally, prices fall then start to recover, but not to the level before tariffs were imposed.
“You’re not going to like that first six months after tariffs go in place,” he says.