Bruce Babcock, director of the Center for Agricultural and Rural Development (CARD) at Iowa State University, has reevaluated his estimate of the impact on corn prices if a waiver of the Renewable Fuels Standard (RFS) was enacted. He now says higher gasoline prices impact greater market demand for ethanol, which reduces a mandate waiver's impact on corn prices.
Babcock explains his model is calibrated to information that is available at the current time, including USDA’s Supply & Demand projections, and the level of futures prices for gasoline, corn and ethanol. "A brief overview of the model is that it finds equilibrium prices of U.S. corn ethanol, Brazilian sugarcane ethanol, U.S. biodiesel, corn, soybeans, soybean meal and soybean oil. The prices depend on the level of wholesale gasoline prices, U.S. corn and soybean yields, soybean yields in Brazil and Argentina, and the level of Brazilian ethanol production.
A full list of assumptions used the model are available at this link.
Babcock concludes based on current variables, 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." He continues to say, "The 2.4 billion gallon amount of flexibility assumed in this study lowers the corn price impact of the ethanol mandate in this drought year from $2.49 per bushel to $0.58 per bushel. This means that waiving would lower corn prices by about 7.4%."
Babcock explains the second key finding to his analysis is that if the current price of ethanol relative to gasoline accurately reflects the value of ethanol to blenders, then the "price of ethanol will be supported at quite an attractive level as long as ethanol quantities are not pushing up against the blend wall." This implies that ethanol plants will be a strong competitor for corn even without a mandate, he says. "In the 'no mandate scenario' simulated here, ethanol production drops by only 500 million gallons when the mandate is waived. This 500 million gallon drop in supply is enough to raise the value of ethanol in the marketplace to support 11.5 billion gallons of production and continue high corn prices. The desire by livestock groups to see additional flexibility on ethanol mandates may not result in as large a drop in feed costs as they hope," he says.
"The results of this analysis cannot be interpreted as concluding that ethanol production has no impact on corn prices. If U.S. ethanol consumption were somehow banned, then U.S. corn prices would drop to an average of $2.67 per bushel," concludes Babcock. "But there is no mechanism for implementing a ban on corn ethanol production. The only tool that the U.S. government has at its disposal to lower corn prices is to waive the mandate."