Tweet This
During the Republican primary, Donald Trump spoke out in favor of the Renewable Fuel Standard (RFS) program, which was first passed into law with the Energy Policy Act of 2005 (and subsequently expanded in 2007). The RFS established quotas of renewable fuels that had to be blended into the fuel supply, and an enforcement mechanism to ensure those quotas were met.
This law resulted in an explosion of renewable fuels in the U.S., the biggest beneficiary of which was corn ethanol. When the RFS was passed, the U.S. produced under 4 billion gallons of ethanol. By 2010 ethanol production had more than tripled to 13 billion gallons, and today stands at over 15 billion gallons.
Clearly the RFS was a boon to the ethanol industry. It also has widespread congressional support across farm states, and is viewed favorably by the new president. Further, the Environmental Protection Agency (EPA) -- which is charged with implementation of the RFS -- recently finalized 2017 volume requirements that are 6% above the 2016 numbers.
So why should the ethanol industry be concerned? Precisely because the EPA implements the RFS.
Trump’s pick to head the EPA -- Scott Pruitt -- has repeatedly fought against the RFS. As EPA Administrator, Pruitt would have the authority to invoke a waiver to lower the volume of ethanol that must be blended into the fuel supply -- a move he has advocated in the past. Thus, if Pruitt is confirmed such a move is likely in my opinion, and this will likely create an oversupply situation.
Despite this risk, ethanol producers rallied after the election. Shares of ethanol suppliers Green Plains, REX American Resources and Pacific Ethanol all surged by double digits in the weeks after the election, but have pulled back in the past two weeks.
The counterargument to this would be that Trump will support the ethanol industry, because it supports his "Buy American" philosophy. That is of course true, but keep in mind that Trump is surrounded by advisers with ties to the oil and gas industry. They hate the RFS, because they don't like being forced to sell a competing product. They are going to come down strongly against the RFS as currently written. They will tell Trump that mandated ethanol keeps U.S. oil in the ground, and that ethanol should be forced to compete without the benefit of the mandate.
This is where I think Trump will compromise. He will decide not to go after the RFS, but then will allow the EPA to lower the mandated volumes. This would have a chilling effect on the ethanol industry while benefiting the refiners penalized under the current rules.
As a result, I would urge caution with the ethanol sector in 2017, at least until the policy direction becomes clear. The downside seems relatively high given the risks ahead, and it's hard to see much upside past this year.
(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)
Robert Rapier's Most Popular
