Columbia, Missouri
August 22, 2005
Increased ethanol demand from the Energy Policy
Act of 2005 will boost corn prices by an average of 12.5 cents
per bushel, according to a study* by the
University of Missouri's
Food and Agricultural Policy
Research Institute (FAPRI).
The energy bill mandates use of 7.5 billion gallons of renewable
fuels by 2012. The FAPRI economists based their study on 7
billion gallons of that being U.S. ethanol produced from corn.
Overall, net farm income increases by an average of $298 million
per year during 2011 to 2015. Corn production increases to meet
ethanol demand while corn exports, feed use, and carryover
stocks decline. Growers of other grains benefit from increased
demand.
Livestock and poultry sectors face relatively small changes in
prices, according to the report prepared under a USDA grant.
Livestock feeders who feared increased competition for feed
grains from the ethanol plants can benefit from lower byproduct
feed costs.
Byproducts, such as high-protein dried distiller's grains, are
used in livestock rations. This new source of protein drops
prices of soybean meal about 10 percent.
The increase in net farm income was smaller than expected, said
Pat Westhoff, FAPRI policy analyst. However, computer models of
the agricultural economy show that lower government payments
offset higher corn price receipts. When grain prices go up,
federal crop payments, such as the counter cyclical program and
loan deficiency payments, go down.
Savings to taxpayers from reduced federal payments could amount
to $1 billion per year from 2011 to 2015. However, tax receipts
for government spending could drop. Ethanol fuel receives tax
exemptions as an incentive to increase production.
The analysis shows unanticipated outcomes, said both Westhoff
and Scott Brown, FAPRI livestock analyst who worked on the
study. The analysis confirms prior expectations that increased
ethanol production would boost corn prices, increase acreage,
and raise net farm income; however, some benefits were lower
than anticipated.
Impacts on dairy and beef cattle producers are ambiguous, said
the authors. A lot depends on location of feedlots in relation
to ethanol plants.
"Cattle producers with access to cheaper corn by-products will
see reduced production costs, while feeders relying on more
expensive grain will see increased costs," Brown said. On
average, cost of cattle feed increases slightly, as corn makes
up a large part of cattle finishing rations.
Poultry producers who feed large amounts of protein in their
rations could benefit from lower soybean meal prices. However,
hog producers, using proportionally more corn and less protein
meal, on average face higher feed costs.
"These changes are usually less than 1 percent and should not
cause marked changes in any livestock sectors," Brown said.
The FAPRI economists conclude that a switch to corn byproduct
feed leaves total feed consumption largely unchanged.
Overall increase in net farm income was less than anticipated
before the study, Westhoff said. Not only did government
payments drop, but production costs increased. As farm income
goes up, so do land rental payments, a significant cost to
today's large crop farms.
Under the energy bill, corn acreage rises in response to price
incentive. More land goes into corn production, resulting in
slightly lower soybean acreage.
"The bump in corn prices means corn exports do not increase as
rapidly as they otherwise might have," Westhoff said. "Corn
export demand is expected to increase over the next decade, with
China becoming, eventually, a corn importer instead of an
exporter."
FAPRI based the study on several assumptions on market
variables, the authors said. "A great deal depends on how the
legislation is implemented and how market actors respond."
For the study, FAPRI assumed 7 billion of the 7.5 billion-gallon
mandated for renewable fuels would be supplied by U.S. ethanol.
Other options exist, however. Ethanol could be imported or made
from wood chips, sugar, sorghum or other raw stocks. The study
assumes a modest increase in biodiesel from soybean oil.
Unknown is how many ethanol plants will come into production.
Price of ethanol may prove a limiting factor. However, ethanol
mandates in the energy bill give more security to investors
planning to build new plants.
Westhoff said ethanol production has more than doubled in the
past four years, with 75 plants online. Capacity is expected to
double again by 2012.
Westhoff cautioned that results depend greatly on market
conditions -- energy costs and corn prices. Also unknown is
price of gasoline and price refiners will pay for ethanol.
"In recent months, we've seen big swings in both gasoline and
ethanol prices," Westhoff said. "Price volatility will likely
continue even with the new legislation."
The report examines the market and farm income impacts of
building ethanol plants as value-added projects for rural
communities. Both wet mill and dry mill processes are studied.
FAPRI made the study in cooperation with
University of Missouri
agricultural economist Joe Parcell and economists at Iowa State
University FAPRI. The U.S. Congress funds FAPRI, to provide
economic and policy analysis
* Report: "Implications of Increased Ethanol Production for U.S.
Agriculture" in PDF format:
http://www.fapri.missouri.edu/outreach/publications/2005/FAPRI_UMC_Report_10_05.pdf |