Corn prices would not necessarily moderate if the U.S. Environmental Protection Agency (EPA) temporarily suspended the corn ethanol mandate, according to a report by three Purdue University economists.
However, the report, "Potential Impacts of a Partial Waiver of the Ethanol Blending Rules," suggests that corn prices could fall under some scenarios should the EPA grant a partial waiver of the EPA’s Renewable Fuels Standard (RFS) but only under certain market conditions. The authors of the paper include Wallace Tyner, Farzad Taheripour and Christopher Hurt.
"The range of impact of a RFS waiver goes from zero to $1.30 per bushel for corn," says Tyner, an energy policy specialist and the report's lead author. The comments were made in a live webinar Thursday hosted by the Farm Foundation and Purdue University at which the report's authors discussed their findings of the report.
The effect of a waiver on corn prices depends on the 2012 harvest as well as future oil prices, among other factors. "If corn prices remain high, which seems likely, and crude oil remains at $100 a barrel or lower, then reducing the RFS could reduce the demand for ethanol and, consequently, the demand for corn," Tyner said. “Conversely, an EPA waiver could have little effect if crude oil moves beyond $120 a barrel and oil companies continue blending ethanol at current levels. If drought conditions abate and corn production reaches 11.5 billion bushels, corn prices could fall to $7.02 a bushel under a full RFS ethanol mandate.”
The RFS mandates 13.2 billion gallons of ethanol be blended with gasoline in 2012; that number increases to 13.8 billion gallons in 2013.
At the start of the current crop season, U.S. corn production was projected at 14.7 billion bushels, with a U.S. farm price of $5.34 per bushel. USDA now estimates corn production will reach only 10.8 billion bushels this year, with the price $8.20 a bushel. If the drought strengthens and EPA sticks to the mandated 13.8 billion gallons of ethanol in 2013, a corn crop of 10.5 billion bushels could push corn prices to $8.57 per bushel, according to the report.
Under its normal schedule, EPA has until October to gather information on the extent of any economic harm done by the original RFS level and to decide if it will issue a waiver. For consumers, the decision could affect what they pay for fuel and food.
With corn crops shriveling in the field and yield projections dropping, corn prices have jumped 60 percent since June 15. A bushel of corn currently sells at around $8. The prospect of a diminished crop and record high corn prices has livestock producers worried that corn—the main feed ingredient in swine diets--might not be available or will be too expensive to buy. “There will not be enough corn to go around,” said Chris Hurt. “Certainly, there will be major impacts on the livestock sector.”
A coalition of livestock and poultry producers, the Governors of four states, 156 U.S. House members, 26 U.S Senators have requested a full or partial waiver of the RFS. The ethanol industry and corn grower organizations oppose a waiver.
Because oil companies blended 2.6 billion gallons of ethanol with gasoline above what was required in previous years, they have built up blending credits--known as renewable fuel identification numbers (RINs). Blenders are allowed to count RINs toward blending totals in this or future years.
"However, because of carry-forward blending credits from prior years--the RINs--refiners and blenders could decide to produce and blend 2 billion fewer gallons of ethanol," Tyner said. "That change alone could reduce the price of corn around 67 cents a bushel. And that is without any EPA waiver."
EPA will have much to consider before rendering its waiver decision, Tyner said. "It will have to determine what impact a waiver actually would have, given the way the market functions at present," he said. "For technical and economic reasons, refiners may well continue to use nearly the same amount of ethanol, even if they are not required to because of a waiver. If refiners and blenders don't have or choose not to use operating flexibility, and if reduced use of ethanol is not economical, then a waiver would have no impact."
"To the extent that refiners and blenders do have flexibility with their use of ethanol, a small waiver could reduce corn prices around 47 cents a bushel, while a large waiver could reduce it as much as $1.30 a bushel, depending on economic conditions."
Should a waiver lead to reduced ethanol use, EPA could have an influence on who bears the brunt of the drought-related corn losses, Tyner said. "The total amount of harm from the drought is in the tens of billions of dollars," he said. "The EPA cannot change the loss. It can only potentially redistribute it among the affected parties: ethanol producers, livestock producers, corn growers and domestic and foreign consumers."