Tuesday, July 3, 2012

What is rising faster than corn prices? RIN prices

RIN prices, the tool to show compliance with US mandates are still cheap but have risen by over 60% in the last two weeks, far more than maize prices themselves. It looks like the biofuel sector is taking notice and starting to ration itself. RIN carry was very high into the year and so with this short crop we have that quantity to play with in reducing maize consumption this year. With the way the mandates work and some approximation of carry in, there is about 25 million metric tons that could be cut from biofuel maize use. Now it won’t be that large, folks won’t want to expose themselves to the risk of carrying out NO RINs into 2013, but we could see a reduction in RIN stocks and thus less maize demanded than would be determined strictly by equating the mandate gap with the maize needed to fill it and a decline in use of maize for ethanol is certainly a strong possibility. Add to that the little understood fact that the carry in limit applies to totals and not the gap created for maize and that is another (admittedly small) 3.5 million metric tons of play in maize demand.

RIN prices in the 2012 vintage have moved up from a recent low (not giving exact prices) of just over 1 cent a gallon go just under 2 cents a gallon in the last couple of weeks. Seems to me there is some upside potential in this market, of course there is always the risk the EPA could wade in with a waiver cutting RIN holders off at the knees if things get bad enough.......

Some Math at the extreme (and in bushels!)

My math was off in the metric tons calculation so I’ve fixed it.
I’m going to talk in calendar year because that is the mandate timing, you have to convert back to guess at the effect in crop years, so I’ll use a standard conversion and the calendar numbers.

If your corn grind is 4.82 million bushels (2.74 gallons per bushel) to make the conventional mandate gap (this gap in the mandates that maize starch ethanol can access) of 13.2 billion gallons, then this represents a use with no flexibility or RIN carry. However there is 20% RIN carry in allowed and we most certainly over produced for the 2011 mandate. BUT it isn’t 20% of the 13.6 mandate because that isn’t really a mandate, it is a GAP in the mandate system. It is really 20% of the individual mandates and you can’t exceed 20% carry in on any of them individually or in the total. So let’s see what we have with respect to the other mandates, probably zero carry in for cellulosics, we probably didn’t import much more than we needed for the 2011 obligation (tariff effect?)  and with all the fraudulent biodiesel RINs and the weird inversion of 2011 to 2012 vintage biodiesel RINs prices I doubt we had much of any carryover of biodiesel RINs into 2012. So if we ignore those (say the advanced and sub-categories RIN carry are zero), the amount that you could use of maize based ethanol RINs carried in from 2011 isn’t   ( 0.2*13.2billion gallons) = 2.64 billion gallons of RIN carry but the whole total of (0.2*15.2billion gallons) = 3.04 billion gallons of RIN carry potentially. So at the extreme, if you have zero carry in of non-maize biofuels and you carry out zero RINS into 2013, there is 3.04/2.74*1000 =  1.1 billion bushels  (28  million metric tons) of play in the demand for maize to produce biofuels.  This is of course at the extreme because it probably wasn’t zero carry of non-maize RINs into 2012 (but I bet it isn’t large) and at the same time, I don’t know for certain how many conventional (maize based in this case) RINs were carried into 2012 but you could approximate this. Also folks won’t want to carry in zero RINs into 2012 so they won’t run RIN stocks down to zero, but at any rate, there is room for some rationing on the ethanol side!

So 4.82 billion bushels needed? What fraction of the 1.1 billion bushes it could potentially be reduced exists and is reasonable? (again, I think this is a very large fraction) and how much are folks willing to draw down RIN stocks (the bigger question and why RIN prices will be interesting this year)?

I’m not going to yet guess what grind will actually be.


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