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Report: Ending ethanol mandates would gut corn prices

Agriculture.com Staff 06/02/2009 @ 2:01pm

Ending all current biofuels mandates would take a big bite out of corn market prices, but Increasing the ethanol blend from 10% to 15% could create "modest" gains in ethanol use and corn prices, according to a report released late last month. And, industry members say the gains in corn prices and ethanol demand could come with no change in consumer food prices.

A recent report from the University of Missouri Food and Agricultural Policy Research Institute (FAPRI) looking at the different potential federal policy on the biofuels industry indicates corn prices would increase by 1.1% if the ethanol mandate is bumped to 15%. While not a huge jump in this marketplace, The shift would measure larger for other sectors of the industry, says Growth Energy CEO Tom Buis.

"The study shows that there is a zero percent change in consumer food expenditures when moving to a 15% ethanol blend, while net farm income is expected to increase $460 million," Buis says. "Previous studies have shown a higher ethanol blend will create and support more than 130,000 new green-collar jobs and inject $24.4 billion into the U.S. economy annually.

"This study further reinforces that America's farmers can produce enough corn to meet food and fuel needs without using additional land or disrupting the global food supply," he adds.

On the other side of the coin, FAPRI analysts say axeing current ethanol mandates altogether would have a much stronger negative effect on ethanol demand and the corn market. "The effect of removing all corn ethanol support policies is not equal to the sum of the effects of eliminating them one at a time. With no tax credits, tariffs or mandates supporting corn ethanol use, average ethanol production declines by 5.5 billion gallons and corn prices fall by 13.1%," according to the FAPRI report.

A scaling back of current mandates would have a greater negative impact than the potential increase in corn prices led by bumping the ethanol blend to 15%. That's because current policies are "redundant," says the report, entitled Impacts of Selected U.S. Ethanol Policy Options.

"A scenario that reduces the average use mandate by 1 billion gallons reduces average ethanol production by 0.56 billion gallons and corn prices by 1.0%. Without a mandate supporting use of corn-based ethanol, ethanol production falls by an average of 1.91 billion gallons and corn prices decline by 4.6," according to the FAPRI report. "The effect of removing all corn ethanol support policies is not equal to the sum of the effects of eliminating them one at a time."

In the report, FAPRI analysts look at different scenarios for the ethanol industry under different conditions, including government support, corn production and market prices, crop size and crude oil prices. According to University of Illinois Extension specialist Stu Ellis, a few conclusions include:

  • If Congress allows either the blenders' credit or ethanol tariff to expire next year, there will be less ethanol produced and corn prices will decline marginally over the period of 2011 to 2018.
  • Any downward change in the Renewable Fuels Standard curtails ethanol production and reduces corn prices. An elimination of the federal policy would depress corn prices nearly 5%.
  • The removal of one ethanol support policy has marginal impact, but the elimination of all three policies would curtail ethanol production by 5.5 billion gallons and would cause corn prices to fall by more than 13%.
  • When corn prices are high, any moderation or modification of the biofuels policies will reduce ethanol production and slightly reduces corn prices.
  • If the ethanol blend is raised from 10% to 15%, there is only a modest increase in ethanol use and a 1% increase in corn prices.
  • Whatever changes are made to ethanol policies, other market fundamentals such as weather and oil prices will raise or lower their importance.

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