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Ethanol mandates & corn prices

There's been a lot of talk lately of putting the federal Renewable Fuels Standard (RFS) on hold because of this year's drought-shortened corn crop and what that could mean to prices down the road for both feed and fuel if the ethanol mandate is left in place, especially considering already tight supplies.

A recent study by Bruce Babcock, economist with the Iowa State University Center for Agricultural and Rural Development (CARD) breaks down scenarios for potential change in the RFS and projected ranges of corn yields, then estimates market prices based on those combined factors. It also takes into account different ways of handling excess blending credits, or RINs, namely whether any excess credits may be available from last year to help meet the RFS mandate.

The CARD study makes a few assumptions about some major variables. In 1988, the last major drought year, corn yields were 25% below trend and soybeans were 17% below trend. Babcock extrapolates those percentages to this year's yield potential to reach a range for ultimate yield potential this fall.

"Maximum corn yield is set at 148 bu/ac in this analysis. Average yield is set at 138 bu/ac, and 120 bu/ac is the lowest possible yield. The 1988 yield loss, expressed as a percent decline from 1988 trend yield, was 25%. Applying this percent yield loss to the 2012 trend yield gives 122 bu/ac," Babcock says. "For this analysis, the maximum yield is set at 41 bu/ac, the minimum yield is set at 35 bu/ac, and the mean yield is set at 39 bu/ac."

There's just over $1 range in projected corn prices depending on whether the full RFS mandate is left in effect, it's allowed to carry forward past years' excess blending credits, or if it's suspended or ended altogether. With a full mandate, Babcock expects an average corn price of $6.97/bushel. With a "flexible mandate" allowing excess credits to carry forward into the next year, the average corn price would round out around $6.06/bushel. And, if the RFS is ended, corn could wind up around $5.78/bushel.

For soybeans, the projected price ranges between $15.89 and $15.15/bushel.

"The first is that the flexibility built into the Renewable Fuels Standard allowing obligated parties to carry over blending credits (RINs) from previous years significantly lowers the economic impacts of a short crop,  because it introduces flexibility into the mandate," Babcock says. "If gasoline prices drop, then a waiver of the mandate would have a larger impact. Across the lowest 20% of wholesale gasoline prices used in this study, granting a waiver of the corn ethanol mandate would lower corn prices by an average of $1.13 per bushel from $5.88 to $4.75 per bushel. The average price of gasoline in this 20% of draws is $1.87 per gallon."

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