American RFS2 Is a Game Changer: Canada Needs To Do Its Part Too
Years ago, I used to write about the conveyor to the moon. My idea of course stems from the fact that there was too much corn at any one time. My utopian solution was to ship all that corn to the moon. At least there it would be off the market and prices down here on earth could rebound easily. So with our market swooning over the last few weeks maybe it’s time to set the auger up again to the moon.
You think I’m getting desperate? Well, maybe but there was something last week which was significant in the marketplace that may give us hope for our marketing future. In the United States the Environmental Protection Agency released their renewable fuel standards commonly referred to as RFS2. This was widely anticipated and at the end of the day in my opinion American agriculture wins. Under the new RFS2, 12.95 billion gallons of biofuels will be added to the mandate this year, which is up 17% from last year. Of course sitting on the sidelines are Canadian producers, but at the end of the day this new structural demand for grain can only be positive.
As a Canadian commenting on American political institutions I have to be careful. It has being pointed out more than once from my American readers that Canadians aren’t very good at that. The EPA took into consideration something called “indirect land-use change”. That refers to an increase in US corn acreage planted in response to increased ethanol production causing farmers in other countries to make certain land-use decisions. When this was included in EPA modeling corn-based ethanol achieved a 21% greenhouse gas reduction compared to gasoline. With 20% being a sort of litmus test for the EPA, at the end of the day corn-based ethanol won.
When I heard the ruling I was somewhat flummoxed because I wasn’t hearing a lot of cheering south of the border. However from my perspective it seemed that this new RFS2 standard maintained the American direction and policy intent of supporting biofuel production. So as time wears on what grain producers can expect on both sides of our border is a creeping demand, which at least in the short term will increase based on this new RFS2. With the market as bearish as it’s being this past week, that bit of good news was like a cool breeze on a hot August afternoon.
The 20% greenhouse gas emission requirement is important because corn-based ethanol is capped at 15 billion gallons within the RFS. However, ethanol producers will be able to go beyond this if they maintain their reduction of greenhouse gas emissions by 20% when compared to gasoline.
Still, ethanol remains a dirty word in some circles. Unfortunately, some of those circles are Canadian political circles. It is a true measure of the importance of ethanol to one sector of American agriculture that even in a deep session the EPA comes out positive for corn-based ethanol. In Canada the same type of policy initiative is dead as a doornail. There is no political direction whatsoever to increase our biofuel standards and requirements anywhere in Canada.
It’s that way because, yes ethanol remains a dirty word in political circles but it’s also that way because of Canada’s position as an oil exporter. Some surely would point at Canada and our Alberta tar sands as a dirty greenhouse gas emitter. Of course our governments are tied with the task of how to balance it out. In my mind that means a healthy Canadian biofuels sector. Is anybody out there in our prorogued political never never land even see that the radar screen?
I don’t think so. However, our farm groups do get it and it is something we should be continually emphasizing. Canadian biofuels can contribute to greenhouse gas reduction and to some extent offset the bad optics coming from the Canadian tar sands. Getting there from a Canadian perspective is almost impossible compared to what our American friends have accomplished. How do you go toward a coherent Canadian biofuels policy, which will benefit Canadian agriculture when essentially there is no policy now? In the fractured world of Canadian agricultural policy at lease at the present time it’s a nonstarter.
Economics will surely play a part too. We know that the right combination of corn, ethanol, oil and gasoline prices make this thing work. Governments do too; case in point the Ontario provincial government under Premier Dalton McGuinty. Without the Ontario government dogged determination Ontario would be without its present ethanol industry. So it is a mixed bag, this biofuel thing. The challenge is surely to get everybody on the same page.
For the most part, that’s a Canadian thing. Simply put, in Canada we don’t have a strong desire or commitment to biofuels or agriculture in general. On the other hand, in the United States our American friends are supporting their grain producers in not only reducing greenhouse gases but also reducing their dependence on anti-American oil producers in the Middle East and Venezuela. The recent EPA decision wasn’t an accident. It was a result of sound policy decisions made over of years with specific goals in mind. American farmers will surely benefit. Despite it all, Canadian farmers will too. The pitiful part is, if we got our act together up here, we could do our part too.