Proposed ethanol reduction could hurt farmers

Gas pump with ethanol biofuel.
Ulrich | Baumgarten | Getty Images

The Obama administration proposed on Friday slashing federal requirements for U.S. biofuel use in 2014, partially bowing to pressure from the petroleum industry and attempting to prevent a projected fuel crunch next year.

The Environmental Protection Agency proposed to cut overall use of renewable fuels—made mostly from U.S. corn and to a lesser extent from soybeans, grasses, crop waste and Brazilian sugar cane—to a range of 15 billion to 15.52 billion gallons.

Within that range, the agency proposed a goal of 15.21 billion gallons, which is more than 16 percent lower than the previous 18.15 billion gallons contained in the law that governs the Renewable Fuel Standard (RFS), and below the 2013 level of 16.55 billion gallons.

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The proposed goal matches the number in a draft that was leaked and circulated in October.

The EPA's proposal to reduce the renewable fuels targets is a partial win for the petroleum industry but a loss for biofuel producers, and followed a prolonged lobbying blitz on both sides of the issue.

Is gas-to-liquid the new fuel solution?
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The plan follows the agency's warnings that the country was approaching a point when the RFS would require the use of more ethanol than can be blended into gasoline at the 10 percent level that dominates the U.S. fueling infrastructure.

Refiners have said this impending "blend wall,'' if left in place, would force them to export more fuel or produce less gasoline, leading to shortages and higher prices at the pump.

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U.S. gasoline demand had been expected to rise every year when Congress passed the Renewable Fuels Standard in 2007, but it peaked in 2008 and has been anemic sincepartly because fuel efficiency of U.S. cars and light trucks has risen.

"This unanticipated reduction in fuel consumption brings us to the point where the realities of the fuel market must be addressed to properly implement the program,'' a senior administration official told reporters in a teleconference about the proposal.

The EPA's proposal falls short of a request from two major oil and gas trade groups to lower the 2014 renewable fuel use target to 14.8 billion gallons.

The plan cuts the 2014 advanced biofuel use target to a range of 2.0 billion to 2.51 billion gallons.

The agency did not propose a specific 2014 volume for ethanol made from corn.

But the proposed change in advanced biofuels implies a corn ethanol mandate of 12.7 billion to 13.2 billion gallons down from the previous 2014 mandate of 14.4 billion gallons.

Chicago corn futures fell to new lows for the day, down 1.1 percent at $4.21-3/4 per bushel, although the impact was muted because Friday's announcement was similar to the leaked proposal from October. Prices this month hit their lowest point in more than three years.

The EPA expects to release a final rule next spring after a 60-day public comment period.

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Following the announcement, December ethanol futures on CME and corn futures traded lower.

—By CNBC with Associated Press reports