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Corn States vs. Oil States

04.29.2018 | Ben Phillips, CFA

Policy Investing Corn Grower

Two commodity industry groups are battling right now to protect their business models. It’s the corn growers of the Midwest against the oil refiners of the South. Both groups are vying for the president’s attention on the country’s ethanol mandate. How did the two industry groups end up in a fight?


Ethanol Blending Mandate


A 2005 law required oil refiners to blend 10% of a plant-based ethanol into the fuel they produce or buy credits called Renewable Identification Numbers (RINs) from rivals to cover their blending obligations. Congress’s goal was to lower carbon emissions and decrease the country’s reliance on foreign oil sources at a time when gas prices were soaring.


Corn growing farmers and corn state politicians celebrated the ethanol mandate, as it represented another buyer for their corn crop. Refiners claimed the requirement to purchase RINs represented another tax and burden on their business model.


Fast forward to today, and the country has evolved from an oil importer reliant on other nations to a country saturated with oil after the shale drilling boom. Plus, RIN prices increased materially after numerous parties, including Wall Street traders, sensed a profit opportunity from the increased RIN demand. The increasing RIN prices add more expense to refining companies and shrink their profits.

Policy Investing Ethanol


Trump’s Mediation Efforts & the EPA’s Involvement


The White House has tried to play deal maker over the past few months. There have been meetings in the Oval Office and administrative proposals, one of which included a year-round ethanol mandate. The proposal is a change from the current ethanol mandate that excludes the summer months due to smog concerns. To date, the White House has not had much of an impact.


The EPA is also involved in the negotiations as one of the country’s primary energy regulators. After years of denying credit waivers for refiners, EPA chief Scott Pruitt started to grant RIN relief to refiners in March of this year when Philadelphia Energy Solutions filed for bankruptcy after its costs to comply with the program rose to $231 million in 2016. The March RIN waiver led to a cascade of refiner requests, with pending applications that include the oil giants Exxon Mobil and Chevron.


The EPA credit waivers have resulted in falling prices for RINs, with the cost of the credits decreasing by 50% in recent months as traders and companies have grown increasingly confident the Trump administration will take action to reduce the burden oil refiners face in complying with the law.

Policy Investing Oil Refiner


Impacted Companies


A change in the country’s ethanol mandate could meaningfully impact the agriculture and refining industries. Below are the companies and sectors we’re watching:


  • Ethanol Producers: Archer Daniels Midland (ADM), Valero Energy (VLO), and Green Plains Renewable Energy (GPRE) are among the top 5 ethanol producers in the U.S. Increased ethanol demand may benefit the largest producers and increase ethanol production margins, which have been weak due to industry overproduction.
  • Oil Refiners: In our view, refining companies benefit from RIN reform. Companies such as Marathon Petroleum (MPC), Phillips 66 (PSX), HollyFrontier (HFC), and CVR Refining (CVRR) may see their margins expand as the price of RINs decrease or waivers are granted.


Next Steps?


The ethanol mandate battle has put the Trump administration at a crossroads: cut government regulation or support the U.S. agriculture industry and ethanol mandate. The corn growing states and politicians, particularly Iowa, will continue to push the Trump administration to adopt a year-round ethanol mandate and stop granting credit waivers.


The corn growing states have three key selling points: China is pursuing agriculture related tariffs against the U.S., Iowa plays a key role in the presidential election primaries, and Senator Chuck Grassley (R-IA) leads the powerful Senate Judiciary Committee, which is leading the investigation into Russian election interference.


The oil refining states will continue to appeal to Trump’s deregulatory agenda. The refining group wields considerable lobbying power and maintains the support of EPA chief Scott Pruitt, who advocated against the RIN system during his time as Oklahoma attorney general.



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Important Information

Active Weighting Advisors LLC ("AWA") is an SEC-registered investment adviser that manages ETFs under the brand name EventShares Funds. Mr. Phillips is the Chief Investment Officer of AWA. The views expressed are subject to change, and no forecasts can be guaranteed. The comments may not be relied upon as recommendations, investment advice or an indication of trading intent. AWA is not soliciting any action based on this document. In preparing this document, the author has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources. Investing involves risk, including the possible loss of principal and fluctuation of value. Mr. Phillips and AWA disclaim responsibility for updating information. In addition, Mr. Phillips and AWA disclaim responsibility for third-party content, including information accessed through hyperlinks. For more information about EventShares, contact us by calling 877.539.1510 or visit our website at www.EventShares.com.


Policy Investing

Policy investing focuses on understanding the laws and regulations that impact companies. It attempts to find mispriced assets and invest in those companies before the market understands the implications to a company’s profitability and operations.