Bill would ease ethanol rule when corn stocks low

WASHINGTON (Reuters) - Two U.S. lawmakers are seeking to dilute the requirement to blend increasing amounts of ethanol into the nation's motor fuel mix, aiming to alleviate upward pressure on food prices when corn supplies are short.

Under a bill to be introduced by Bob Goodlatte and Jim Costa on Wednesday, Congress would reduce the mandate for ethanol whenever stocks of corn, used to make the biofuel, are tight.

"The federal government's creation of an artificial market for the ethanol industry has quite frankly created a domino effect that is hurting consumers," the Congressmen said.

It would be the first legislative attack of the year on the so-called Renewable Fuels Standard, which has been criticized since grain prices skyrocketed in 2008. The RFS guarantees biofuels a share of the motor fuel market, set at 12.6 billion gallons this year and peaking at 15 billion gallons in 2015.

Forty percent of the U.S. corn crop is converted into ethanol, roughly the same portion as used in livestock feed. Cattle, hog and poultry groups say ethanol makers have an unfair advantage due to the RFS and have driven up feed prices to ruinous levels.

Livestock groups were to join Goodlatte, a former Republican chairman of the House Agriculture Committee from Virginia, and Costa, California Democrat, to discuss the legislation. Goodlatte and Costa represent districts with large livestock operations.

In a letter seeking co-sponsors, Goodlatte and Costa said their bill would require a reduction in the RFS when corn stocks are strained, using as an indicator the stocks-to-use ratio, which measures the inventory buffer in case of any crop failure in the United States or a supply shortfall elsewhere in the world.

Reductions would begin when the ratio drops below 10 percent, said an analysis by consultants MF Global. They gradually would increase to a 50 percent reduction when the ratio is below 5 percent, a bare-bones level. At current levels of corn supply, the reduction would be 15 percent or 25 percent.

MF Global analyst Mark McMinimy said it was unlikely the bill would be enacted this year due to the short time left on the legislative calendar. "That said, we do not discount the real possibility for the RFS to be modified within the next few years, though not necessarily along the lines contemplated in this legislation," wrote McMinimy in a research note.

An ethanol trade group, the Renewable Fuels Association, said ethanol has been a minor contributor to grain, or food, prices and the stocks-to-use ratio is not a reliable forecaster of grain prices. The culprit behind higher food prices, said RFA, is sustained high prices for petroleum, used throughout the supply chain.

"This (bill) is simply the wrong policy to address corn supply concerns," said RFA president Bob Dinneen while Goodlatte and Costa circulated their letter among colleagues.

(Reporting by Charles Abbott; Editing by Alden Bentley)