A new briefing paper from the Center for Agricultural and Rural Development at Iowa State University provides a preliminary glimpse of the economic effects of short corn and soybean crops this year and a potential waiver of the Renewable Fuels Standard. While there is no way of knowing for sure how low yields will go, CARD Director Bruce Babcock modeled scenarios based on yield losses similar to those experienced in the 1988 drought.
“The potential economic impact of low yields—particularly corn yields—is heightened this year because of a low buffer stock of corn,and because 10 percent of our motor fuel supply comes from corn,” he points out. “Two findings stand out. The first is that 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. 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 $1.19 per bushel to $0.28 per bushel. This means that relaxing the mandate further would have modest impacts on corn prices,” he writes.
Babcock emphasizes that his results are conditional on the distribution of corn yields used in this study. If corn yields turn out to be much lower than assumed, then the impact of the mandate would be far greater. For example, the average corn-price impact of relaxing the mandate across the lowest 20 percent of the 500 yield draws used in this study is $0.44 per gallon. The average yield across the lowest 20 percent of yields is 130.5 bushels per acre. If corn yields turn out to be greater than assumed here then the impacts of relaxing the mandate would be even lower.
The second finding 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 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. In the no mandate scenario simulated here, ethanol production drops by only 600 million gallons when the mandate is waived. The desire by livestock groups to see additional flexibility in ethanol mandates may not result in as large a drop in feed costs as hoped,” Babcock writes. “Of course, this high value of ethanol is only high relative to the price of gasoline. If gasoline prices drop, then a waiver of the mandate would have a larger impact.”
The finding that corn prices would be only 4% lower with an RFS waiver seems reasonable and is consistent with what we've been saying,” explains Geoff Cooper, Vice President for Research and Analysis for the Renewable Fuels Association. “Clearly, waiving the RFS would not provide the measure of relief from high corn prices that the corporate livestock industry is seeking. The CARD study underscores that there is significant flexibility in meeting the RFS, and the use of excess RINs can take pressure off physical ethanol and corn markets.” To see the full briefing paper, click: http://www.card.iastate.edu/publications/dbs/pdffiles/12pb7.pdf
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