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StudyBiofuels demand shoots skyward under new energy bill

Agriculture.com Staff 11/27/2015 @ 6:33pm

Biofuel mandates in the energy bill passed by Congress could result in significantly higher corn and soybean use for fuel than would have occurred under pre-mandate policies, University of Missouri economists say in a university report.

Production of corn-based ethanol goes up 24% and soydiesel goes up 89% under one set of assumptions in analyzing the Energy Independence and Security Act of 2007, according to the MU Food and Agricultural Policy Research Institute (FAPRI).

"Increased biofuel use results in higher prices for corn, soybeans and other crops," says FAPRI senior analyst Pat Westhoff. This brings a $3.4 billion increase in U.S. average annual net farm income under one scenario.

"To generate mandated levels of biofuel, prices paid to producers must be higher than they otherwise would have been," Westhoff says. "The energy bill results in a 17% increase in average wholesale prices for corn-based ethanol and a 37% price increase for biodiesel.

"The energy bill signed into law will have greater impact on farm commodity prices than any farm bill being considered," Westhoff says. Mandates to use set levels of biofuels increase demand for corn and vegetable oil and affect market-driven prices more than current or proposed farm bills.

FAPRI analyzed impacts of mandates using computer models of agriculture in the United States and the world. Results will be used to project agricultural baselines given to Congress annually. Those are expected by March 1.

In this analysis, economists used an implied mandate of 15 billion gallons of corn ethanol and 1 billion gallons of soydiesel. Mandates for other alternative fuels, such as cellulosic ethanol, are in the bill but were not analyzed.

Westhoff says many assumptions are necessary for any analysis of outcomes from the energy bill. "The biggest unknown is price of petroleum," he said. "If oil remains above $80 per barrel, corn-based ethanol production might exceed 15 billion gallons even without a mandate."

In the analysis, FAPRI looked at five scenarios, with three related to new mandates. Westhoff said the 28-page report looks at a small part of "very large and very complex legislation." Only corn-based ethanol and soy biodiesel were considered.

Legislated demand increases corn use by 1.1 billion bushels annually from 2011 to 2016 relative to pre-energy-bill markets. About 30% of that increase comes from more corn production. Another 30% comes from reduced corn exports, while the remainder comes from cuts in livestock feed and other domestic uses.

In the same period, soy oil use increases by 2.7 billion pounds on average. About half of that comes from reduced food oil exports with reduced domestic use and increased soy oil production accounting for the rest.

"Strong demand for corn and soybeans translates into higher prices for those commodities," Westhoff says. The report shows corn prices going up an average eight percent and soy oil up 36%. Soybean prices increase by an average of nine percent.

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