EPA ruling allays concerns over biofuels mandates

CHICAGO Tue May 5, 2009 8:41pm BST

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CHICAGO (Reuters) - Investors who had bought corn betting that corn-based ethanol would prevail cheered on Tuesday as the U.S. Environmental Protection Agency confirmed the government's targets for biofuel use in the United States.

A draft ruling from the EPA also helped to allays fears among some investors that the administration of U.S. President Barack Obama could restructure mandates set by the former government on the blending of biofuels with gasoline through 2022.

Chicago Board of Trade corn futures took the decision in stride, with traders considering it a neutral factor. The spot contract closed up 0.1 percent at $3.98-1/2 per bushel.

"There wasn't much reaction in the corn market to the rulings because the U.S. is already bumping up against the limit of 15 billion gallons of ethanol (set for 2015) that can be made from corn and the EPA decisions won't affect that target," said Shawn McCambridge, analyst for Prudential Bache Commodities.

"I think there was some concern going in to today and psychologically it may be a little bearish for the corn market because it doesn't change the demand structure," he said.

The EPA on Tuesday issued a draft rule calling for increased use of advanced biofuels and to measure carbon dioxide emissions from the alternative motor fuels.

The steps are designed to reduce the impact biofuels have on the climate and food prices and the EPA said ethanol made from corn will still play an important role.

"Corn-based ethanol is a bridge to the next generation of biofuels," said EPA administrator Lisa Jackson in a teleconference.

Global grain and food giant Archer Daniels Midland was a pioneer in making ethanol fuel from corn.

"We feel quite positively that there is a recommitment of efforts associated with supporting biofuels in the market, both first-generation and second-generation" Archer Daniels Midland CEO Patricia Woertz said on Tuesday.

"There has been further discussion about higher blend rates. A petition for 15 percent, even if that does not occur, up to 12 percent, would allow additional ethanol to flow to the markets," she said.

The EPA left alone the mandated 15 billion gallons (57 billion liters) of ethanol to be made from corn by 2015 and 16 billion gallons of cellulosic ethanol, or fuel made from non-food crops such as switchgrass and fast-growing trees.

"They can't do away with the corn/ethanol mandate because right now they don't have a choice but they're going to spend a lot of money on advanced biofuels use, such as fuels from cellulosic sources," said Dan Cekander, analyst for Newedge USA.

Tuesday's move by the EPA confirms the schedule of the 2007 Renewable Fuels Standard, which calls for the blending of 36 billion gallons (136 billion liters) per year of biofuels into gasoline by 2022.

There had been some concern that corn used for fuel might be in jeopardy because in April, California adopted its own low-carbon fuels standard, the world's first-ever regulations aimed at slashing emissions of planet-warming carbon dioxide from vehicle fuels.

That rule gave biofuels like first-generation ethanol low marks for indirect land use. But it gave some time for the industry to shift to greater production of next-generation fuels, which are expected to be cleaner over their life cycle.

The EPA acknowledged on Tuesday that some corn-based ethanol plants don't meet the carbon dioxide emission standards, Cekander said.

"I think some people might have gotten a little nervous when the EPA said some corn ethanol plants don't meet the CO2 emission standards," he said.

The Washington-based Renewable Fuels Association (RFA), a pro-ethanol group, applauded the EPA's rulings.

"EPA has done yeoman's work in developing the framework upon which the expanded Renewable Fuels Standard (RFS) will be implemented," RFA president and chief executive officer Bob Dinneen said in a statement.

Rich Feltes, director of research for MF Global, wrote in a note to clients that he did not expect EPA's rulings to affect the demand for corn.

(Reporting by Sam Nelson; Additional reporting by Karl Plume; Editing by Marguerita Choy)

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