The US government need not waive its ethanol laws to curb the industry's call on thinning corn supplies – and politically may be reluctant to as well, despite vehement calls from livestock producers.

Groups representing dairy, beef, pork and poultry industries, which compete with biofuel plants for corn, on Monday revealed they were to petition a waiver in rules enforcing minimal levels at which the ethanol must be blended into gasoline.

"The drought-induced reductions in the corn supply means that the mandated utilisation of corn for renewable fuels will so reduce the supply of corn and increase its price that livestock and poultry producers will be forced to reduce the size of their herds and flocks," the petition from 19 groups said.

Besides "causing some [producers] to go out of business… these herd and flock reductions will ripple through the meat, milk and poultry sectors, causing severe harm in the form of more job and economic losses".

'Causing economic harm'

"It's time for the Federal government to get out of the business of picking winners and losers by forcing corn into ethanol plants regardless of its impact on the economy," Rob Vandenheuvel, at the California-based Milk Producers' Council, said at the weekend.

"Congress gave Environmental Protection Agency the ability to adjust the [ethanol] mandate in cases where it was causing economic harm. That time is now."

At broker Allendale, Paul Georgy said: "The increase in food prices is getting attention in Washington and around the world," noting that France is considering calling a meeting of a G20 grain market action group.

Inventories drawn down

However, there is significant potential for high corn prices to ration the grain's use by ethanol plants without action from Washington, Societe Generale said, flagging the potential for blenders to turn to elevated US inventories rather than fresh production for supplies.

Indeed, official data have shown US inventories of ethanol declining, to 19.01m barrels, down more than 2m barrels since mid-June when fears for Midwest drought sent corn prices soaring – and began telling on production of the biofuel.

Ethanol production has fallen below 800,000 barrels a day for the first time since records began two years ago, and down from levels above 900,000 barrels a day in early June.

The US could also cut its ethanol exports, with a reduction back to 2010 levels saving some 300m bushels of corn, in terms of the equivalent in production of the biofuel.

"While the different is not massive, it does provide some additional cushion to the US corn balance if exports continue to be reduced throughout the rest of the year and into 2013," SocGen said.

Rins aid

Furthermore, the use by blenders of so-called renewable identification numbers, or Rins, could provide significant leeway to cut ethanol use.

Rins, which are assigned by US authorities to each gallon of renewable fuel, can be used as a credit against up to 20% of the next year's mandate for blending ethanol into gasoline.

Rins covering 2.7bn gallons of ethanol could be used in 2012-13, equivalent to saving nearly 1bn bushels of corn use in making the biofuel.

"While the increased use of Rins would certainly raise their prices, perhaps to the point where they were no longer economically feasible… it is safe to assume that the use of Rins can play a significant part in reducing corn demand for the 2012-13 crop year."

Political considerations

Cutting the ethanol mandate may also not prove politically popular in that, while appeasing powerful livestock lobbies, it risks angering corn producers in states such as Iowa, Michigan and Ohio which represent important "swing states" in deciding the result of this year's presidential poll, at which President Barack Obama is fighting for re-election.

"There are perhaps only 8-10 swing states that will decide the winner of the election, with most other states firmly leaning one way or another, no matter what happens," SocGen said.

"Therefore, if faced with a choice of making the livestock producers and food industry happy, or making the corn producers happy, the White House will probably choose the latter."

Research from Iowa State University also indicates that removing the mandate may only cut corn prices about $0.28 bushel, less than 5%.