Energy Bill Boosts Corn Prices by 12.5 Cents

Overall net farm income increases by an average of $298 million per year during 2011 to 2015 thanks to the recently passed Energy Bill. Compiled by staff

Published on: Aug 24, 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 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%.

The increase in net farm income was smaller than expected, says 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, says 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, say 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 says. 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% and should not cause marked changes in any livestock sectors," Brown says.

The FAPRI economists conclude that a switch to corn byproduct feed leaves total feed consumption largely unchanged.

Higher corn prices encourage more corn acres

Overall increase in net farm income was less than anticipated before the study, Westhoff says. 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 says. "Corn export demand is expected to increase over the next decade, with China becoming, eventually, a corn importer instead of an exporter."

Accounting for the unknowns

FAPRI based the study on several assumptions on market variables, the author says. "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 says 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 says. "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 MU agricultural economist Joe Parcell and economists at Iowa State University FAPRI. The U.S. Congress funds FAPRI, to provide economic and policy analysis

The 63-page report is on the Internet at Implications of Increased Ethanol Production for U.S. Agriculture.