With the severe drought in the corn belt states causing untold damage to corn crops, corn prices have increased to nearly $8/bushel. With nearly 40% of corn grown this year destined for ethanol production, food prices, especially those using corn are very likely to skyrocket according to the US Department of Agriculture. Pressure is mounting on Congress to demand that the EPA reduce the ethanol mandate, at least until the corn crop recovers, possibly next year. Here's a recent article on the issue:
Is it time to reduce the ethanol
mandate?
As the 2012 drought expands and intensifies across the heat-baked
U.S. Corn Belt driving corn prices to all-time record highs, the Renewable Fuel
Standard (RFS) mandating the production of ethanol is being debated with
increased intensity.
With cash corn prices stretching up to record levels of
$8 per bushel, many ask, ‘is now the time to reduce or waive the ethanol
production requirement’? The answer to the question depends on who you ask.
The nation’s
corn growers say leave the RFS alone. “When it comes to the Renewable Fuel
Standard for ethanol and other biofuels, now is not the time for changes,"
says National Corn Growers Association President Garry Niemeyer in a statement
responding to media coverage on the drought. “The RFS is revitalizing rural
America, reducing our dependence on foreign fuel and reducing the cost of
gasoline.”
A coalition of livestock and poultry groups, however,
takes the opposite view. The group, which includes the National Pork Producers
Council, is urging Congress to reform the RFS. The livestock and poultry
producers cite a study conducted by Thomas Elam, president of FarmEcon LLC,
showing that federal ethanol policy has increased and destabilized corn,
soybean and wheat prices to the detriment of food and fuel producers and consumers.
“The increases
we’ve seen in commodity prices are strongly associated with the RFS mandate,”
said Elam. “At the same time, we haven’t seen the promised benefits on oil
imports or gasoline prices. This means that while Americans are forced to pay
more for food, they’re also not seeing lower prices at the pump; it’s a
lose-lose situation.”
In comments to
Pork Network, Ron Plain, University of Missouri agricultural economist, looks
at several aspects related to reducing ethanol production.
According to Plain,
one bushel of corn will produce about 2.75 gallons of ethanol and 17 pounds of
distillers’ dried grains with solubles (DDGS), a co-product of ethanol
production used to supplement livestock and poultry feed.
The RFS for
calendar year 2012 is 13.2 billion gallons of ethanol from grain and 13.8
billion gallons for 2013, Plain says. “At 2.75 gallons per bushel of
corn, this is 4.8 billion bushels and 5.02 billion bushels, respectively. If
ethanol production is reduced by 1 billion gallons, it would free up 363.6
million bushels of corn for feed or other use but, it would also reduce DDGS
production by 3.09 million tons.”
Plain estimates
that for every 1 billion gallon decrease in ethanol production, the feed supply
increases by 7.09 million tons or the equivalent of 253 million bushels of
corn,.
Plain also
looks at historic relationship of projected corn yield and its effect on corn
price. “In early May when USDA was predicting a 14.79 billion bushel corn
harvest, December futures were trading at $5.00 per bushel. On July 11
USDA predicted a 12.97 billion bushel corn harvest and December corn was
trading at $7.00. “So for a 1.82 billion bushel drop in production we had
a $2.00 rise in price, or a $1.10 price rise per billion bushel decline
in corn production.”
Plain believes
it would be reasonable that the same relationship between corn availability and
price also would work in reverse and a billion bushels of extra production
would take $1.10 per bushel off of corn prices.
So what effect
on corn price would result by decreasing ethanol production? “The math says
that for each billion gallons of reduced ethanol production it would reduce
corn prices by 28 cents per bushel (253/1000 times $1.10),” Plain estimates.
“However, I would predict the decline would be more as it would establish a
precedent and make corn demand for ethanol look much less assured.”
