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What Happens to Corn Prices without the Ethanol Mandate?

July 23, 2013
By: Ed Clark, Top Producer Business and Issues Editor
corn kernel dollars
  

The debate about the future of biofuels mandates is running hot and heavy in Congress with the outcome too close to call. What would be the impact on corn prices if the ethanol mandate were wiped out entirely?
 
Not great, so far as current ethanol use is concerned, says Bruce Babcock, Iowa State University ag economist.

(Click to read: What Farmers Need From Biofuels Policy in 2014)

"The mandate increases corn prices by about 25¢ per bushel," Babcock says. He spoke July 17 at the Federal Reserve Bank of Kansas City’s Agricultural Symposium. "The impact of policy mandates on 2013/14 producer profitability is modest," he says. This year’s Renewable Fuels Standard (RFS) mandate is 13.8 billion gallons of ethanol, increasing to 14.4 billion gallons next year, and 15 billion gallons by 2015. A 15 billion gallon mandate has only a modest increase on corn prices as well, in Babcock’s view.

His outlook assumes favorable weather now through 2014/15, thus big crops and much lower corn prices than this year, potentially reaching sub-$4 levels for 2014/15.

"Without a 2014 drop in acreage, stocks could grow to 2.5 billion bushels," he says. That would represent a tripling in stocks from the current 2012/13 marketing year. Obviously, with or without a mandate, continued ethanol demand is important.

What gives and why does he believe the mandate would only have a minor impact on corn prices and ethanol demand?

"If you didn’t have the mandate, ethanol would still be 9% to 10% of the nation’s fuel supply," Babcock says. While oil companies did not welcome the mandate in the RFS, they found themselves making money by using ethanol as a cost-effective octane booster, taking lower octane petroleum and increasing it to required octane levels for ultimate sale, he says.

Ironically, at the same time oil companies are fighting the ethanol industry over higher blends in the future, ethanol is making them money today. "Since it’s profitable for oil companies to use ethanol, I assume that even without a mandate, they would continue to be rational when it comes to buying it," Babcock says.

Still, there are two variables that could, without a mandate, cause lower ethanol use. "If gasoline prices—caused by a major decline in crude oil prices—drop precipitously, then mandates have a larger impact," Babcock says.

If weather conditions are unfavorable and moves corn prices higher, mandates will boost corn prices by more than under unfavorable weather, he adds.

Eliminating the mandates would have another impact, Babcock says. The value of RINs, or ethanol production credits, that oil companies purchase to meet the mandate, currently are valued at $1.35 per gallon. Without the mandate, the RIN price would fall to zero, Babcock says. Even with a mandate, he sees RIN prices declining.

Babcock says that without question, the mandates contained in the RFS have been important in creating 3 billion bushels in additional annual corn demand, or net 2.25 billion bushels, factoring in distillers dried grains.

Corn ethanol production has increased by 8.5 billion gallons since 2006. The result is that corn used for ethanol is now the No. 1 source of demand for the grain.

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