Manchin Withholds Support for BBB; Debt Limit Solution at Hand in Congress

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EPA raises food vs fuel debate for renewable diesel; Ethanol sector aid finally detailed
 


In Today’s Digital Newspaper


Note: Different format for dispatch today due to travel-related snafus, including grounding all planes landing in New Orleans (fog), then taking a United flight to Houston and then to Chicago. Let’s just say it was a short night… Like Congress, a lot of work to do in a short time… at least I will get something done.



— Manchin still not on board with BBB. Centrist Sen. Joe Manchin (D-W.Va.) Tuesday said he would not yet back the social infrastructure/climate change/Build Back Better (BBB) package out of concerns over inflation and the length of some of the programs proposed in the package. “The unknown we’re facing today is much greater than the need that people believe in this aspirational bill that we’re looking at,” Manchin said in remarks to the Wall Street Journal CEO Council Summit. “We’ve gotta make sure we get this right. We just can’t continue to flood the market, as we’ve done.”

     Manchin and Sen. Kyrsten Sinema (D-Ariz.) remain keys in the BBB outcome in the Senate and Manchin has already succeeded in getting the package dramatically pared down from the initial $3.5 trillion spending levels.

     And Manchin continues to push back against the deadlines for action on BBB that Democratic leaders have continued to set only to adjust them. “We’ve done so many good things in the last 10 months, and no one is taking a breath,” he noted. Given that the measure makes changes to the tax code, social spending and climate change, Manchin simply said, “We get any one of those wrong and we’re in trouble.”

     The bill has no GOP support, so they can’t lose a single senator from their own party.

     No exit strategy. While his clashes with the Democratic party have raised questions of whether he may exit the Democratic party to join Republicans, Manchin did not indicate that was an option he was looking at. “I’m caught between the two, but the bottom line is, you have to be caucusing somewhere,” he said, adding, “I don’t intend to leave.” This continues to point to the BBB plan not being finished by Christmas as Democratic leaders have hoped.

— NWS: Developing winter storm to produce the first widespread and significant snow of the season across parts of the Sierra Nevada, Intermountain West, Central Rockies, and central High Plains on Thursday and Friday... ...Light snow possible across the Northeast today and Upper Great Lakes on Thursday... ...Potentially record-breaking warm temperatures to build across the south-central United States.

     NWS

— House clears measure that sets stage for Senate to approve hike in debt limit. The House Tuesday voted 222-212 to approve a measure that sets the stage for a Senate vote on increasing the debt limit. The package is part of a deal brokered between Senate Majority Leader Chuck Schumer (D-N.Y.) and Senate Minority Leader Mitch McConnell (R-Ky.) that would use a bill previously passed by both the House and Senate with amendment as the legislative vehicle. The measure would also include a prevention of PAYGO cuts to Medicare, farm programs and several others, a move aimed at getting the needed support of 10 Republicans for the procedural motion that would pave the way for a simple majority vote on the package. The plan would increase the debt limit by a yet-to-be-determined amount and would have to be acted on before January 16. There would be only 10 hours of debate on the plan and no amendments. McConnell told reporters after briefing his caucus that the Republican stance Democrats would have to increase the debt limit on their own has not changed. "The red line is intact," he said. "The red line is that you have a simple-majority, party-line vote on the debt ceiling. That's exactly where we will end up."

— Lawmakers warned that legislative fixes could make supply chain mess ever worse. Private-sector officials testifying before a Senate Commerce, Science and Transportation subcommittee Tuesday welcomed steps take by the Biden administration to address supply chain disruptions, but they also warned that some of the potential legislative fixes could actually make matters worse. The hearing focused on ocean shipping supply chain issues, with World Shipping Council CEO John Butler commenting ocean carriers are “getting mixed messages.” Legislation that would limit the ability to use detention and demurrage charges/incentives to move cargo away from ports is one example, he said. He also pointed to the Biden administration order that ocean carriers need to load empty containers on outbound ships once they clear ports, but there is pending legislation that would order loaded containers to be put on ships ahead of empty ones. “There is no legislative silver bullet on this, but it is possible to make the situation worse,” he said. Butler also said that there is a limited number of things government can do to unwind the current situation. Issues outlined at the hearing reflect conditions that have emerged during the Covid-19 pandemic that have yet to be resolved, and like many situations, there does not appear to be a single answer — either legislatively or administratively.

— Controversial Biden pick for comptroller drops out. Saule Omarova, the controversial pick by President Joe Biden to be comptroller of the currency, Tuesday said her nomination was “no longer tenable” and that she was withdrawing her name to become a key banking regulator. A combination of banking interests, Republicans and moderate Democrats who expressed concern about her views on the US financial system, bank regulation and legislation on the Office of the Comptroller of the Currency. Sen. Jon Tester (D-Mont.) indicated he was also concerned about Omarova’s comments on the oil and gas industry.

— Pfizer says a third dose of its coronavirus vaccine is needed for “significant protection” against the Omicron variant. Initial evidence showed that two doses alone “may not be sufficient” to guard against infection but may ward off severe illness, Pfizer and BioNTech announced this morning. In other coronavirus news, Britain is reportedly preparing to impose new pandemic restrictions, and scientists have discovered a variant of the Omicron variant that is harder to distinguish with standard tests.

— Ahead: inventory headaches. Retailer headaches over inventories are unlikely to end with the holidays. Businesses that have been rushing to get shelves stocked this year may face a new challenge soon, the Wall Street Journal reports (link), as late-arriving shipments raise the potential for excess or outdated inventory. The cloud hanging over inventory planning is the latest result of the pandemic-driven turmoil that has knocked supply chains off balance this year. Retailers face high stakes this quarter, and bottlenecks across distribution networks add new layers of uncertainty. Although broad measures show inventories still at historically low levels, vast quantities of goods are stuck in logjams and could hit storefronts too late for the critical sales season. The concerns are particularly strong at smaller merchants that lack the clout or the capital to ship around the backups and that soon may have more inventory on hand than they bargained for.

     Inventory

— Analyst Jim Wyckoff sizes up what’s ahead for the Federal Reserve: “As Omicron moves off the front burner of the marketplace, focus is on other matters such as new ideas the Federal Reserve will move even more quickly to end its bond-buying program, so it can start raising U.S. interest rates. The Fed’s FOMC meets next week. The marketplace now expects the Fed to hike rates in May of next year. The Fed recently abandoned its notion that inflation is just ‘transitory.’”

— Companies plan big raises. Companies are planning for steep wage increases next year, according to a new report, amid a tight labor market and the highest inflation in three decades. A survey by the Conference Board finds that companies are setting aside an average 3.9% of total payroll for wage increases next year, the most since 2008. The survey also shows that companies are planning on raising salary ranges, which would result in higher minimum, median and maximum salaries. That suggests pay raises could be broad-based and affect workers across a company’s pay scale. The results are a sign the recent acceleration in private-sector wages is likely to carry over into 2022.

     Salaries

— China Evergrande didn’t make payments due on some U.S. dollar bonds, potentially setting the stage for a default and one of the country’s largest debt restructurings.

— Inflation has emerged as a pressing concern for American voters, with a majority saying it is causing them financial strain, a WSJ poll showed (link). Voters are also pessimistic about the economy and short on confidence in President Biden’s leadership, according to the survey, a warning for Democrats ahead of midterm elections.   

— The U.S. trade deficit narrowed sharply in October as an increase in exports of energy and agricultural commodities outpaced growth in imports, which were restrained by a backlog at U.S. ports that month. The deficit in trade of goods and services fell by 17.6% to a seasonally adjusted $67.1 billion in October, the Commerce Department said, compared with a record $81.4 billion gap in September. The report covered a period in which disruptions to the supply chain had grown especially acute.

     Trade update

     The strong month for U.S. exports was driven by a range of factors, some of which are unlikely to persist. A jump in crude-oil exports reflected U.S. refineries that came back online in October after being partially shut down in September after Hurricane Ida struck Louisiana. China stepped up soybean purchases in the final months of the two-year U.S.-China trade deal which called for Beijing to hit certain purchase targets of U.S. goods. Despite the increase in October, China is poised to miss its purchasing goals for U.S. agriculture, manufacturing and energy by wide margins.

     China Phase 1

— Biden warns Putin of sanctions if Russia invades Ukraine. President Joe Biden warned Russian President Vladimir Putin in a video meeting on Tuesday the West would impose "strong economic and other measures" on Russia if it invades Ukraine, including disruption of the Nord Stream 2 gas pipeline to Europe, and that the U.S. and European allies would provide additional defensive capabilities to Ukraine. Putin responded to the warning with a demand for reliable, legally binding guarantees against NATO expansion eastward and complained about NATO attempts to “develop Ukrainian territory,” the Kremlin said. No breakthroughs were reported but both sides agreed to continue communications.

     Right after the meeting Congress added $300 million in military aid to Ukraine to its annual spending.

— Nomination hearing for Califf to head FDA set. Robert Califf, nominated by President Joe Biden as FDA commissioner, will appear December 14 for his confirmation hearing at the Senate Health, Education, Labor and Pensions Committee. If he wins confirmation as expected, this would mark Califf’s second round heading the agency. He served as FDA chief at the end of the Obama administration. While two senators, who also voted against his nomination in 2016, have expressed opposition to his nomination—Sens. Joe Manchin (D-W.Va.) and Richard Blumenthal (D-Conn.) — Califf is still expected to be approved for the role.

— Kellogg workers reject contract offer. Workers at Kellogg plants in four states overwhelmingly rejected a contract offer worked out between negotiators, according to Bloomberg. The deal included cost-of-living increases and a 3% rise in wages with expanded benefits for all workers. Rejection of the five-year contract means that workers at Kellogg plants in Pennsylvania, Nebraska, Michigan, and Tennessee will remain on strike as they have been since October 5.

— Japan economy declined more than expected in third quarter. The Japanese economy contracted 3.6% on an annualized in the third quarter, a steeper decline for the July-September period than the prior estimate which said there was a 3.0% contract. The Japanese economy declined 0.9% compared with the second quarter. Private consumption fell 1.3% in the latest update versus an initial 1.1% decline. And public investment also declined more sharply than previously expected, falling 2.0% versus the initial 1.5% decline. This continues to underscore the uneven nature of economic performance around the globe.

— EPA finally details RFS levels for 2021, 2022 with retroactive cut to 2020.

     Highlights:
     * Long-delayed proposed levels from EPA below 15 billion for conventional ethanol until 2022.
     * Situation remains unclear about small refinery exemptions (SREs).
     * USDA unveils $800 million in biofuel assistance, including $700 million they have promised is coming since June.

     The targets for 2021 are proposed at 18.52 billion gallons for total biofuel, with 20.77 billion gallons for 2022. The EPA proposals would reduce the level for conventional ethanol to 13.32 billion gallons for 2021 but raise it back to the statutory level of 15 billion gallons for 2022.

     The plan would set total biofuels for 2020 at 17.13 billion gallons, down from the level the agency finalized for 2020 initially at 20.09 billion gallons. The total would include 12.5 billion gallons of conventional ethanol, with the plan reflecting the sharp downturn in gasoline demand from the pandemic.

     As for advanced ethanol, that category would be at 5.2 billion gallons for 2021 and 5.77 billion gallons for 2022, with the 2020 level reduced to 4.63 billion gallons. That would be down from 5.09 billion gallons that was finalized previously for 2020.

     EPA also proposed to add a 250-million-gallon “supplemental obligation” to the volumes proposed for 2022 and stated its intent to add another 250 million gallons in 2023. “This would address the remand of the 2014-2016 annual rule by the DC Circuit Court of Appeals in Americans for Clean Energy v. EPA,” the agency said. EPA said that total of 500 million gallons was the level the court the agency “improperly waived” for the 2016 year but will add 250 million gallons each for 2022 and 2023.

     EPA said the action lays out a proposed regulatory framework to allow biointermediates to be included in the RFS program, while ensuring environmental and programmatic safeguards are in place.

     As for 2020, EPA said the pandemic and drop in fuel demand, “especially the disproportionate fall in gasoline demand relative to diesel demand, significantly reduced the production and use of biofuels in 2020 below the volumes we anticipated could be achieved.” EPA also said that the level of small refinery exemptions (SREs) for 2020 “will be far lower than projected in the 2020 final rule.”

     For 2021 levels, EPA said the marks set “are based on actual renewable fuel use for months in 2021 where data are available and projections of renewable fuel use for the remainder of the year.”

     For 2022, EPA said the levels are “significantly higher than the proposed volumes for 2020 and 2021.” Those levels are based on “analysis of the statutory factors, including our assessment of the ability for the RFS program to incentivize increased production and use of renewable fuel in 2022, the statutory intent to support increasing production and use of renewable fuels, and the potential positive impacts of renewable fuels on several of the statutory factors such as climate change and energy security.”

     EPA said it also considered for the 2022 levels “market and infrastructure constraints to the ability of RFS annual volume requirements to incentivize increased production and use of renewable fuel in the near term. These constraints include the commercial availability of cellulosic biofuel, the price and availability of feedstocks, and the availability of infrastructure to distribute higher level blends of ethanol.”

     The 2022 level implies a conventional ethanol component of 15 billion gallons. EPA noted that the use of E10 fuel is economic for refiners and blenders but pointed out that the use of E10 alone “has not been sufficient to achieve the 15 billion gallons of ethanol use due to declining gasoline demand.” Plus, the agency said they do not expect “growth in the use of higher ethanol blends through 2022 will increase rapidly enough to result in significantly greater volumes of ethanol consumption in the US, even with the incentives created by the RFS program standards and other governmental efforts such as USDA’s Blender Infrastructure Program and Higher Blends Infrastructure Incentive Program.” Given those assumptions, EPA said, “we expect that setting the implied volume for conventional renewable fuel below the E10 blendwall would have little impact on domestic biofuel production or use.”

     SREs remain a source of uncertainty. EPA said it was proposing to reject more than 60 pending Small Refinery Exemptions (SREs), but the agency made clear this was not yet a final decision and opted to seek comments. “We continue to consider the impact of these decisions on our SRE policy, and it is still unclear at this time whether we will be granting SREs for 2020, 2021, or 2022, and, if so, to what degree,” EPA said. “Thus, we are proposing a range of exempted volumes of gasoline and diesel as a result of SREs in the calculation of the applicable percentage standards, ranging from zero to 8.19 billion gallons.”

     SREs: EPA data shows 65 pending SREs — 29 for the 2019 compliance year, 28 for the 2020 compliance year, three for the 2018 compliance year and one each for the 2016 and 2017 compliance years. There are also three pending SREs for the 2021 compliance year.

     A footnote in the RFS document for 2020, 2021 and 2022 also stated, “We are not adjudicating any SREs in this action, and this action does not prejudge any SRE petition.”

     The proposal to reject SREs is subject to a separate rulemaking. “This proposed decision is not a final Agency action,” EPA said. “The Agency is issuing a public proposal, and is requesting comment, to inform its final action, recognizing the importance of these decisions and the need for a fully open and transparent process.”

     But the decision will not linger as EPA is proposing a 30-day comment period once the notice is published in the Federal Register.

     Link to pre-publication rule seeking comment on denying SREs.

     Link to EPA document explaining their proposed SRE decision.

     Link to EPA fact sheet on SRE decision

     Biointermediates. EPA in 2016 proposed the Renewables Enhancement and Growth Support (REGS) rule to allow for the production, transfer, and use of biointermediates to generate qualifying renewable fuel under the RFS program. But EPA said that given the amount of time that has passed, it is proposing a new provision to allow for the use of biointermediates to produce qualifying renewable fuels.”

     EPA said they are “reproposing many of the proposed biointermediate provisions from the REGS rule without significant changes, making significant changes to some of the previously proposed provisions, and proposing some provisions for the first time here.”

     The agency said the changes they are proposing compared with the REGS proposal “impact what biointermediates would be allowed under the program and what parties that produce, transfer, and use biointermediates would need to do to demonstrate compliance.”

     EPA said provisions on biointermediates would become effective 60 days after the final rule is published in the Federal Register. But they also cautioned they “may need to finalize a later implementation date to provide us enough time to put in place the compliance and oversight mechanisms necessary to effectively oversee the program.”

     No general waiver to be granted for 2020. EPA said they also would not use the general waiver request for 2020 even though governors from multiple states said they believed the conditions were met to allow a general waiver of RFS levels. “We are not proposing modifications to the 2020 volumes utilizing the general waiver authority in this action,” EPA said.

     Advanced biofuels. EPA noted that most of the non-cellulosic advanced biofuel in the RFS “has been biomass-based diesel, with relatively small volumes of sugarcane ethanol and other advanced biofuels.” They pointed out that all advanced biofuels have the potential to provide significant greenhouse gas (GHG) reductions—"they are required to achieve at least 50% GHG reductions relative to the petroleum fuels they displace.” However, some types of advanced fuels, such as biodiesel and renewable diesel produced from fats, oils, and greases “provide even greater reductions than the 50% threshold.”

     Advanced biodiesel and renewable diesel together comprise 95% or more of the total supply of non-cellulosic advanced biofuel over the last several years, EPA said, “and is expected to supply all of increase in advanced biofuel through 2022.”

     Comments sought on food versus fuel. In their discussion on advanced biofuels, EPA said that there are factors that would argue for lower volumes of advanced biofuels. “Increased demand for soybean oil could lead to diversion of feedstocks from food and other current uses in addition to further incentivizing increased soybean crushing and soybean production,” the agency said. “Increased soybean production in the U.S. and abroad in turn could result in greater conversion of wetlands, adverse impacts on ecosystems and wildlife habitat, adverse impacts [and] negative impacts on water quality and supply, and increased prices for agricultural commodities and food prices.”

     Given that situation, EPA said they are requesting comments on “the impacts of advanced biofuel production on the statutory factors, including impacts on wetlands, ecosystems, and wildlife habitat.”

     USDA unveils a total of $800 million in aid for biofuel sector. As EPA announced the RFS provisions, USDA announced it would make up to $800 million available to support biofuel producers and infrastructure.

     This includes $700 million to provide “economic relief to biofuel producers and restore renewable fuel markets affected by the pandemic.” This aid was authorized via legislation in December 2020. USDA said they would make the funds available through the new Biofuel Producer Program authorized by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). USDA said it would announce the application timeline “within the coming week.”

     Payments will be based on the producer’s market loss volume in 2020, which is calculated by the amount of fuel produced in 2020 in comparison with 2019.

     USDA also will make available $100 million to increase significantly the sales and use of higher blends of bioethanol and biodiesel by expanding the infrastructure for renewable fuels derived from US agricultural products.” That aid will be made available in “coming months,” USDA said.

     The funding will provide grants to refueling and distribution facilities for cost of installation, retrofitting or otherwise upgrading of infrastructure required at a location to ensure the environmentally safe availability of fuel containing bioethanol blends of E-15 and greater or fuel containing biodiesel blends B-20 and greater.

     Comments: The long-awaited RFS levels are now finally out. And they track relatively closely to reports that surfaced in September that signaled reductions were ahead in the RFS program. However, while the overall levels are close for 2020, 2021 and 2022 with those reported earlier this fall, the level of conventional ethanol would be back to the statutory level of 15 billion gallons versus the 14.1 billion gallons that had been reported in September.

     This begs the question of why it took so long for EPA to announce the package that was released for all three years. The changes in 2022 within the mix of fuels to reach the total biofuel level appear to be all that changed. It is also not clear how much of an impact that the review by the Office of Management and Budget (OMB) may have altered the provisions that were eventually announced by EPA. It is clear, however, that there appear to have been political factors potentially at play along with the impacts of the pandemic on US fuel demand.

     But the situation with SREs remains somewhat of a mystery. The pre-publication document on the RFS levels released by EPA indicates they are not proposing any actions at this point on pending SREs despite a separate document released by the agency which proposes rejecting more than 60 pending SRE requests. This situation will not take as long as the RFS levels to finalize as EPA has set a comment period of 30 days on their proposal. Still, that leaves the door open to SREs still being granted under the program.

     It is also not clear when the agency will finalize the RFS levels they are proposing. There will be a virtual public hearing January 4-and January 5 if needed. Comments on the plan are due by February 4 and that could be extended given the three compliance years that are covered in this one notice.

     Reactions have been somewhat predictable with certain Republicans complaining about the reductions in biofuel levels while some Democrats contended it marked a major departure from the actions under the Trump administration. The Renewable Fuels Association (RFA) has said they were disappointed at the retroactive reductions but were at least pleased the level for conventional biofuel would be set at the statutory level of 15 billion gallons. But refiners complained that the proposed 2022 levels will add to already record compliance costs and raise fuel prices for consumers.

     That mix of views could suggest EPA may have found a “sweet spot” of sorts in that its plans to not universally make biofuel backers or refiners totally pleased. But the announcement from EPA still does not answer a basic question: What took so long for the agency to publicly release this plan.

     And the bigger issue ahead is what the agency will do for 2023. The statutory levels only covered the RFS through 2022 and the agency has been working on a proposed plan to set the standards for 2023 and beyond. That will be a critical and even more important package relative to the future of the US biofuel industry. But one glimpse of the issues EPA will include in their plan came from Joe Goffman with the EPA Office of Air and Radiation. He told Reuters in an interview that the agency is considering making electric vehicle (EV) power generation eligible for renewable fuel credits. That will be a major development to monitor and will provide insight into how the Biden administration’s plans for EVs will be met. In other words, stay tuned.

     Link to the pre-publication notice.

     Link to the draft regulatory impact analysis.

     Link to public hearing information.


 

 

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