What Happens to Corn Prices without the Ethanol Mandate?

July 23, 2013 10:15 AM
What Happens to Corn Prices without the Ethanol Mandate?
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.

One impact of ethanol policy has been the diversion of 15 million to 20 million acres to corn production of productive crop ground from traditional uses, Babcock says.

He adds that moving forward, there is no reason why the U.S. ethanol industry could not grow its production by emphasizing exports. "If corn is inexpensive, why not export?"

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Spell Check

7/24/2013 11:51 AM

  E10 is a blend of 10% ethanol and 90% gasoline and is legal for use in any gasoline-powered vehicle. More than 95% of U.S. gasoline contains up to 10% ethanol to boost octane, meet air quality requirements or satisfy the Renewable Fuel Standard law that mandates use of renewable fuels to reduce our nation’s dependence on foreign oil and fossil fuels. E85 is a high-level ethanol-gasoline blend containing 51-83% ethanol, depending on the season and altitude. Drivers can use E85 in flexible fuel vehicles, which are specially designed to run on gasoline, E85 or any mixture of the two. E85 users usually experience a 25-30% drop in fuel economy due to ethanol’s lower energy content. This statement is exactly opposite of what your article claims . E85 users usually experience a 25-30% drop in fuel economy due to ethanol’s lower energy content. This is part of the explanation in the UNION FARMER published by: the ND farmers Union, July 2013 issue. This is my opinion on Ethanol and other subsidies. ETHANOL Speaking of the disadvantages of picking winners and losers in private business, (ISN’T THIS A CAMPAIGN SLOGAN, criticizing BAIL OUTS FOR REPUBLICANS? Picking winners and losers in business?) How about stopping the Ethanol subsidies resulting in a system that is flawed and never will be able to stand on its own at this point because they have no incentive to do so, since they are a business based on, the business of subsidies? REPEAL THE RENEWABLE FUELS MANDATE ASAP. Ethanol is a net environmental deficit because of its own high use of fossil fuel, water and is the cause of tripling of all INPUTS that affects consumers and others businesses that use the same inputs. , a fuel that it is supposed to help the economy, is a dismal failure, tripling costs of fertilizer, spray, and because ethanol competes with all livestock industry, it single handily has put more dairy producers out of business then any one, single other thing. If Ethanol were a private business and I (dairy farmer) wasn’t required to PAY to put myself out of business, then ethanol should carry on. We will compete quite well, thank you. No RNF or RINs. Zero subsidies. I am one of the last Dairy farmers in our area. I had never been so poor, since the Renewable Fuels Mandate caused the huge demand for corn and raised up the input costs that all types of farmers and non-farm businesses alike have to also pay for. Not TO mention the huge cost to consumers on the grocery retail end of things. You do know that even corn farmers can’t afford their inputs. Subsidizing something that can’t compete as of now, is the cause of rising land costs of $400 an acre rents and land at $12,000 per acre in the best Corn growing areas and seeping into non-traditional corn growing areas causing property taxes to rise along with this train wreck. Now to make it worse, we are being stripped of our right to LIBERTY and forced to put ethanol in our cars, since refineries are now being mandated to not sell anything without ethanol in it, except for Premium. So now I will have lose 5 mpg fuel economy AND cause damage to my car. Isn’t that criticism of Obama Care? Forcing someone to buy a product by law? Well, we can’t pay the politicians like the ethanol and the corn lobby can. They are lying for pay and you all are listening for pay, is what it looks like from where I sit here today. You know where real energy independence lies? Get out of the way of our blessed resources, oil, .coal, natural gas. Get refinery permits expedited all over America. You can’t eat that, it will make us energy independent in short order. Any Nation that chooses not to use its food resources and INSTEAD BURNS THEM UP, in the subsidized Ethanol debacle, puts our Nation’s food supply at risk and is a Nation that is very stupid indeed. It’s pretty simple. Two or three droughts in a row will bring this Nation Down. Use for fuel, anything that cannot be used for anything else or make fuel out of waste that you have to PAY to get rid of. I want no subsidies for Dairy either other than a fair playing field. Cut most all subsidies and keep it simple, voluntary, with no requirement to participate in all or nothing mandates for those you keep, and PRIVATIZE crop insurance. You could encourage private insurance to deal in crop insurance by not taxing any profits derived from the sale of crop insurance. Then don’t ruin it by imposing any sort of rules on how or what insurances companies offer to clients. Different companies may offer different coverage's and/or compete with other companies. Just a clean exemption for income taxes derived from supplying crop insurance. This type of government exemption would save billions in administrative costs over what we have now, and be consumer friendly and farmers could buy what they decide they need, not one size fits all. Insurance should not be covering every cloud. You should have many options and not force participation by tying one program to participating in all or nothing. If you have a program, offer it. Do not force its use. One size does not fit all. Stay out of the farmers’ way.........that is my opinion. Just play fair. Those that set their prices set them to their advantage and those who cannot will always lose until less the payment system makes those who set their prices be tied to a percentage of farm share retail, that they would have to pay for a commodity they need to make their product, or raise it at the risk of paying more for the commodity. Then there would not be excessive profits for all who can and continuing less profits for those who cannot. I ONCE HEARD OF SOMETHING CALLED ANTITRUST LAWS.

7/27/2013 03:07 AM

  Excellent article and right on the nail.Congratulations on standing up for the facts. All these subsidized programs are weakening american agriculture. Experience in Brazil with ethanol has proven that engines do NOT last as long and several European manufacturers do NOT give warranty if over 10% ethanol is used.

7/27/2013 03:13 AM

  Smallest Dairy Farmer, you have said it all, especially, "Any Nation that chooses not to use its food resources and INSTEAD BURNS THEM UP, in the subsidized Ethanol debacle, puts our Nation’s food supply at risk and is a Nation that is very stupid indeed. " Dairy farmers like us, and other livestock producers, have been the primary victims of the bipartisan DC corruption that gave us the BS of ethanol in the first place, with consumers thrown under the bus of "special interests" right along with us. To make it all worse for dairy farmers is the outrageous current federal pricing formula (block voted into law by our illustrious Capper-Volstead dairy co-ops in 2000 under the guise of "Order Reform") that does not factor cost of production for any farm input costs and that includes the ramped up feed grain prices due to the feds' ethanol boondoggle. And, yes, antitrust laws should trigger investigations into the dairy cooperative system that plays such a major role in dairy farmers' misery in all categories including the NMPF co-ops' support for taxpayer subsidized dairy "margin insurance" in the joke of a "Farm" Bill.Dairy farmers have been surrendered as "spoils" to the "victors," who are the special interests who have successfully lobbied Congress to support such idiotic ruinous policies for their own financial gain. Those preposterous federal schemes have destroyed our traditional dairy communities also by shortchanging the independent rural support businesses who also depend on a fair milk price being paid to dairy farmers!


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