Ethanol’s Impact on Feed Prices
Nov 21, 2011
At Dairy Today’s Elite Producer Business Conference, we asked Scott Brown from the Food and Agricultural Policy Institute to talk about ethanol’s impact on feed prices. If his analysis is to be believed, you’ll hardly notice any change if ethanol's tax credits are removed.
With ethanol’s volumetric tax credit of 45¢/gal. set to expire at the end of December, dairy producers might expect more than $1/bu. drop in corn prices.
After all, each bushel of corn produces three gallons of ethanol, right? Think again.
Earlier this month at Dairy Today’s Elite Producer Business Conference, we asked Scott Brown from the Food and Agricultural Policy Institute (FAPRI) to talk about ethanol’s impact on feed prices.
If his analysis, and that of the U.S. Congressional Budget Office (CBO) and Iowa State University are to be believed, you’ll hardly notice any change at all.
For one thing, the tax credit is just one appendage of the three-headed ethanol monster: the credit, tariff protection and ethanol usage mandates.
Plus, there are some 200 ethanol plants across the country which now consume 5 billion bushels of corn. “Ethanol infrastructure will not go away even if we eliminate ethanol policy,” says Brown.
Estimates of ethanol policy’s impact on corn prices break down like this:
· CBO: 50¢ to 80¢/bu.
· Iowa State: 59¢/bu.
· FAPRI: 53¢/bu.--with just 2¢ of that coming from the ethanol credit and 11¢ coming from ethanol tariffs. FAPRI also estimates ethanol policy adds just 54¢/bu. to the price of soybeans, $7.87/ton to the price of soybean meal and $3.63/ton to the price of distillers dry grains.
“As a result, you won’t see a huge change in corn and feed prices when the tax credit goes away,” says Brown.
Why not? For one thing, world feed demand has not abated even at these historically high prices. Even with $6/bu. corn, U.S. exports are still 2 billion bushels, or 16% to 17% of the crop. One out of four bushels of soybeans is also being exported.
Eliminating tariffs also won’t help. Brazilian ethanol prices, driven by high world sugar prices, are now higher than U.S. prices. In 2010/2011, the U.S. was thus able to net export some 660 million gallons of ethanol, says Brown.
Ethanol mandated usage is also still on the upswing. In 2011, ethanol production was nearly 13 billion gallons. It is expected to top out at 15 billion gallons by 2015.
Conclusion: “If you want lower corn prices, you want lower crude oil prices,” says Brown. “If we have $100-plus/barrel oil prices, demand for ethanol will only continue to grow.”
(Note: Crude oil went above $100 last Thursday.)
Not surprisingly, Brown didn’t convince everyone in our audience of 400 that taking away the ethanol credit won’t have much, if any, impact on feed prices.
We had about two dozen producers write comments on their evaluations of Brown’s presentation. About a third simply didn’t believe him. Typical of these skeptics: “Bull--Ethanol is the reason Feed is High;” “Informative—maybe misguided;” and (my favorite) “WOW! Is this guy paid by ethanol producers?”
But the neat part of this is that we’ll soon know whether Brown—or the skeptics—are right. It’s highly likely the ethanol credit will expire at the end of the year. If it does, we’ll know how big a roll the credit plays in feed prices.
My guess: Brown, CBO and Iowa State will be right. Then again, I hope I’m wrong.
