Tuesday, February 2, 2016

Cruz Victory Reveals Ethanol Weakness


U.S. Republican presidential candidate Ted Cruz's victory on Monday in corn-rich Iowa could represent a major blow to the country's controversial biofuels program, reflecting its waning influence over politicians even in the U.S. farm heartland.
Cruz, a conservative senator from Texas and outspoken opponent of the Renewable Fuel Standard, or RFS, upset billionaire businessman Donald Trump in the Iowa caucuses, the first of the state-by-state battles to pick party nominees for the Nov. 8 election.
Cruz won with 28 percent of the vote, compared with 24 percent for Trump, in a victory that included taking Kossuth County, the state's biggest corn-producing county.
The result was a setback for corn farmers in the country's biggest ethanol-producing state, who have lobbied hard to protect the policy from being dismantled after more than a decade.
The program requires the use of ethanol and other biofuels in the nation's fuel supply and is aimed at reducing U.S. dependence on foreign oil, utilizing cleaner, domestic energy sources and boosting rural economies.
Cruz now supports a phase-out of requirements for renewable fuel, rather than the immediate repeal he was pushing for in 2013.
Still, the fact he won Iowa without the backing of the ethanol and corn lobby may raise doubts as to whether candidates still need to garner its support in the long term, potentially removing a big pillar of support for the lobby's agenda.
"The conversation inside of Congress in the morning will change instantly, as Republicans realize they can be against the mandate and still win," said Michael McKenna, a Republican strategist and energy lobbyist, speaking of a Cruz win.
It is interesting that Cruz found his greatest support in rural, agricultural regions of Iowa.  Many of the hardcore Tea Party members, most of whom represent rural districts, have long been opposed to the ethanol mandate.  Eliminating the mandate could be a popular bipartisan issue, uniting these rural opponents with Democrats representing urban districts.

The kicker is that in the era after the Renewable Fuel Standard became law, the farm economy has never been more exposed to the negative impacts of a repeal of the mandate.  The corn carryout is at a record high for that time frame, and Chinese demand has essentially dried up.  Add to it low gasoline prices, and ethanol is overpriced as a fuel, mandate or not.  That takes away any economic argument for continuing the 10% blend.

Assuming that politicians were willing to take out the mandate, corn prices would come under tremendous downward pressure, putting the entire rural economy into recession, or worse.  Land prices would fall, rural banks would close, schools and local governments would struggle, and more people would leave for greener pastures in the cities and suburbs.  Ironically, if the corn belt sees a major drought and grain prices rally significantly while oil prices continue to decline, the economic argument against ethanol becomes much stronger and repeal of the mandate becomes the obvious policy.  No matter whether Big Corn can fight off the anti-ethanol forces in the near-term, the mandate won't live much longer, and that makes me bearish on grain prices in the medium to long-term.

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