Citi Research

15 November 2013

Quick post: EPA issues wide 'ranges' for 2014 RFS2 Proposal - Bearish RINs

See: Doshi, Aakash. "Agriculture Digest: Corn, Ethanol, RINs and the Renewable Fuel Standard (RFS2)" Citigroup: 16 October: 2013.
https://ir.citi.com/W1qiG2733fE%2B6iJ4tcOIKaYpFmxaKwCKkgzAV8yVgUowT%2BCY5a%2BrFg%3D%3D

See: Doshi, Aakash. "Lord of the RINs. - Primer" and "Alert: EPA Provides RFS2 (RIN) Policy Updated...no major changes for 2013" Citigroup: 6 August 2013.
https://ir.citi.com/whhj5l5cZ6i6RcQ7NBsKwr%2B5mGd9%2B4AlKkhsdt%2FRhzOHR1ydfxfu2g%3D%3D
https://ir.citi.com/FHuIRHBEt73MTUgt2owygBqtIetFdaehOIC%2FKviVgQyRtvhbfCZigA%3D%3D

The White House and EPA, under pressure from the renewables lobby in recent weeks, has decided to issue a narrow 'range' for the total biofuels mandate in 2014 for the blending of conventional corn ethanol and advanced biofuels into the final US gasoline and diesel supply. Interestingly, the floated proposal for hard targets with the OMB that called for 15.22-bn gal total volumes (13-bn gal conventional, 2.22-bn gal advanced of which 1.92-bn gal in EE terms would have been biomass based diesel) is not at all far removed from today's proposal that called for a total target somewhere between 15-15.52-bn gallons.

The proposed ranges are as follows:
Cellulosic range: 8 to 30-mn gallons
Biomass-based diesel range: ~1.28-bn gallons (as projected and flat y/y - this would be 1.92-bn gal in ethanol equivalent terms)
Advanced biofuels range: 2 - 2.51-bn gallons (versus 2.22-bn gallons per the OMB leaked proposal in October and a statutory schedule of 3.75-bn gallons)
Total renewable fuels: 15 - 15.52-bn gallons (versus 15.22-bn gallons per the OMB leaked proposal in October and a statutory schedule of 18.15-bn gallons).
This suggests that corn-based ethanol mandate will still be somewhere around 13-bn gallons (between 12.7 and 13.2-bn gal) and very near the OMB leaked proposal but far short of the 14.4-bn gallons that would have been mandated by the 2007 law.

This is clearly an easy policy in our view, very unchanged from our detailed analysis and expectations throughout 2013 calling for significant policy relaxation for RFS2 in 2014. RIN markets have plunged 7-fold since hitting $1.48/gal in July (E13s) on expectations on reduced RFS2 blending mandates. Markets had bid up RIN credits modestly in the past 24 hours on expectations of a tighter rule but these proposed blending ranges do not suggest much of a difference from the plan that was with OMB and should be able to be 'physically' achieved given nameplate capacity and estimated final gasoline supply in US next year (~132.9-bn gallons)

This EPA release clearly suggests the agency is cognizant of the E10 'blend-wall' issue and it should generally be seen as a boon for independent refiners that were hit the hardest this year on a binding 2013 rule and very concerned about the future of the policy. RIN prices should continue to be pressured but are unlikely to collapse to zero in our view as there will still be the need for credits depending on the scale of individual RVOs (renewable volume obligations) and some refiners who might have a carryover deficit this year. Furthermore, waiver authority is only for one-year-a permanent solution requires a legislative fix and while there is no clarity yet for 2015 and beyond, it seems that the agency is towards the path of making the policy sustainable.

The EPA authority to curb the advanced carve-out-particularly the cellulosic-seems very clear based on the statute flexibility and is unlikely to face any meaningful legal challenge. The implied cut to the conventional carve-out that falls well below 14.4-bn gal could face mounting pressure from the corn and biofuel lobby and could lead to a structural ceiling on corn-use for ethanol in the US which has surged to nearly 5-bn bushels or 40% of total domestic demand in recent years. To be sure, given current economics, strong corn crush margins, low domestic inventories of ethanol below 15.2-mn bbls, low cash corn costs and a backwardated curve for ethanol processors to sell-into, we think corn use for ethanol (and recent run rates suggest this) in 2013/14 will remain around 4.9-bn bushels but could then be hitting a structural E10 'ceiling' near 5-bn bushels until mid-level blends have greater take away capacity.

Aakash Doshi
+1 212 723 3872 desk
+1 646 593 2870 mobile
+1 646 291 5157 fax
aakash.doshi@citi.com<mailto:aakash.doshi@citi.com>
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