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Tuesday, June 28, 2011

What Happens To Corn If Ethanol Subsidies Disappear?



 

The US Senate votes earlier this month that were for and against continuation of the nation’s ethanol policy indicated the political split over the controversial subsidy program that is designed to enhance ethanol production and foster a declining reliance on petroleum.  The 45¢ per gallon tax credit that goes to blenders helps reduce the cost of ethanol, and the 54¢ tariff is designed to reduce the importation of foreign ethanol.  While Members of Congress feverishly work to re-appropriate the $5 billion spent on ethanol supports among other ethanol programs, it becomes more apparent the subsidies will disappear.  If that happens, what will happen to corn prices, ethanol demand, soybeans, and all of the economic dynamics set in motion by ethanol?

The Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri put its economic models in motion to provide answers to Congress about the impact that the subsidies have on agriculture.  The FAPRI report examines a number of policy scenarios, however the ones that will rise to headline status will be those that show the result of subsidy elimination at the end of the calendar year when they are set to expire.

An expiration of the ethanol supports creates a continuation of ethanol production, but a slowdown in the rate of increased production.  As corn production increases with higher yields, the excess does not become consumed by ethanol, but adds to the carryout stocks and is reflected in exports and domestic production.

The ten year FAPRI forecast for that scenario keeps planted corn acres at the 89 million acre level, and with yield increases up to a 184.5 bushel per acre yield, production climbs from 13.6 bil. bu. in the coming marketing year to 15 bil. bu. by 2020-2021.  Corn being refined for ethanol increases from the current 4.9 bil. bu. to 5.6 bil. bu. in 20/21.  Ending stocks will double, exports will grow by 20%, but farm prices will only be at $4.70 when the ten year period ends, but revenue per acre will edge over $500.

The disappearance of the ethanol subsidy program will have a small impact on soybeans, although acreage will remain static at 77 mil. and yield grows slowly from the current 43 to 48 bu. per acre with total production reaching 3.7 bil. bu.  The domestic crush will slowly grow with the increased production, and exports will likely be locked at 1.6 bil. bu.  Ending stocks will remain steady at 170 mil bu. or less, and farm prices will remain in the 11 dollar range and revenue per acre will grow slightly, but remain under the $400 per acre mark.

With the expiration of the ethanol subsidies, oil prices will rise, but ethanol demand will increase with the federal renewable energy standard.  Oil prices will move upward from $86 per barrel today to $109 per barrel in 2021, and retail prices for unleaded gasoline will be rise to $3.60 per gallon.  Ethanol production will rise from the current 13.6 bil. gallons to 18.7 bil, with 86% of that from corn, and 13% from cellulosic sources.  But imported ethanol will reach nearly 3 bil. gallons and ethanol prices will slowly erode from the current wholesale price of $2.23 per gallon to $2.03 per gallon. 

Summary:
Recent political trends have indicated that the blenders’ credit, and possibly the tariff on imported ethanol may soon be removed.  Such action would not mean the end to ethanol production in the US, but would soften the rapid expansion of ethanol production, and remove some of the premium in corn prices due to ethanol’s additional demand for corn.

 

Posted by Stu Ellis on 06/28 at 07:01 AM | Permalink

Comments

US ethanol may have two other challenges, Brazilian sugar and DDGS. The worldwide economic slowdown has placed the expansion plans of Brazilian sugar production on hold. Their production goals are/were quite lofty. Money had been flowing into Brazil to help their cause. The general model was the building of sugar processing plants that could also produce ethanol. The future profit potential of these plants would be helped by the removal of the tariff in a low price sugar environment. A little less than one quarter of the DDGS produced in this country are exported. China had filed a DDGS “dumping” (moving product into the world market below the cost of production) compliant with the World Trade Organization (WTO). Their compliant may have merit. The current price for DDGS from an Illinois ethanol plant is quoted around $200 per ton. The CME shows DDGS, a physically delivered contract, around $120 per ton. That is a pretty good volume discount or plants in the US are willing/need to off-load DDGS at that price. A WTO loss could be costly. (The US is to or was to pay Brazil some $150 million per year under a WTO agreement till the cotton subsidy program is reworked supposedly in the 2012 farm bill. Congress decided not to fulfill that obligation. We will see how that turns out.) But more costly yet would be the price decline of domestic production to equaling the export market. The WTO procedure takes time. Brazil won their cotton compliant in 2004 and still has not received compensation. So time is most likely on US ethanol side. Too many times long term decisions are based upon short term experiences. If we feel we need to be in the WTO, ethanol subsidies and tariff should go but let’s continue to think through the consequences prior to acting. The very strange thing, as noted in the Missouri report, our three leveled (conventional, advanced and cellulosic) ethanol requirement would favor Brazilian ethanol over US with the dropping of the tariff. Jib aka Gibberish

Posted by: Jib at June 29, 2011 12:12PM

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