As Midsouth growers prepare to harvest the largest corn crop they’ve produced in decades, Congress is considering legislation that has the potential to make corn much more than a passing fancy in the region.
Last month, the Senate passed the Renewable Fuels, Consumer Protection and Energy Efficiency Act of 2007, legislation that, among other things, mandates the use of 15 billion gallons of biofuels in the United States by 2015.
An analysis by agricultural economists with the University of Missouri’s Food and Agricultural Policy Research Institute suggests the mandate would shift more crop acres into corn, boost corn prices, reduce soybean acreage, cut livestock production and have repercussions across all of agriculture.
“The mandate increases cash receipts for corn farmers, but it also increases their expenses through higher land and input costs and lowers their federal commodity supports,” says Pat Westhoff, policy analyst with FAPRI in Columbia, MO. “By placing a floor under the demand for biofuels, the mandate could increase prices for ethanol and biodiesel.”
Westhoff says the mandate for biofuels will encourage farmers to plant an additional 2.3 million acres of corn by 2015 when the mandate is in full effect. That acreage increase comes mostly at the expense of soybeans. (USDA’s latest acreage update puts corn plantings at 92.88 million acres or 3.31 million more than baseline.)
This analysis is in “Impacts of a 15-Billion Gallon Biofuels Use Mandate,” a 33-page report written by Westhoff with the assistance of the staff at FAPRI, a think tank funded, in part, by Congress to provide independent study of proposed legislation. The report compares changes under the mandate with a January 2007 FAPRI baseline under current law.
The report does not consider other provisions in the legislation, Senate Bill 1321, such as the 3-billion-gallons annual increase in required use of “advanced biofuels” such as cellulosic ethanol after 2015.
The increased demand for biofuels increases prices paid to plant operators by an average of 25¢/gal., or a 16% increase. The floor under ethanol demand assures investors in ethanol plants a more stable financial environment.
For farmers, crop cash receipts could go up $3.7 billion in 2015. However, net farm income – the money remaining to spend after expenses – increases by less than half, or $1.6 billion, according to the FAPRI analysis.
By 2015, an additional 898 million bushels of corn, above baseline (4.13 billion bushels), would be required to meet ethanol requirements. That demand would boost corn prices by 20¢/bu., or a 6.6% increase. Soybean prices also would increase, as soybean acreage and production drops. That price increase would make soy biodiesel less competitive and production could fall slightly.
In spite of changes to agriculture – and unlike analyses released by other university researchers in recent weeks – the report shows only small price increases for consumers. U.S. food expenditures may go up $817 million, an increase of 0.1% relative to the baseline. “That is less than $3 per person per year,” Westhoff said.
The biofuel mandate passed the U.S. Senate but has not been taken up by the House of Representatives. The House has not scheduled a vote on the bill, which doubles the current mandate of 7.5 billion gal. by 2012.
The Senate mandate would result in an additional 2.4 billion gal. of ethanol, or a 19% increase above the current policy baseline. Domestic production makes up most of the increase, but imports also would increase.
If petroleum prices remain high or increase, farmers could see even higher prices as the demand for ethanol may exceed the amount mandated, Westhoff said.
Livestock producers, especially those feeding corn in finishing rations, will see increased costs of production. This may result in what Westhoff calls a “modest decline in livestock, poultry and dairy production.”
Reduced production leads to higher prices for fed cattle, hogs, chicken and milk, but those go up less than 2% relative to baseline prices.
“Feeder steer prices decline marginally as higher feed costs lead to lower bids from feedlot operators, in spite of higher fed-cattle prices,” Westhoff said. Higher meat and poultry prices result in slightly lower domestic consumption and reduced exports.
For consumers, meat prices will increase about 1¢/lb. relative to the baseline in 2015.
In addition to ethanol, the plants also turn out a by-product called dried distillers grains or DDGs used for livestock feed. That co-product will increase by 6.6 million tons by 2015, relative to baseline.
Presently, the price of DDGs follows the price of corn. As supplies increase, prices will drop, relative to corn. “To encourage increased use as livestock feed,” Westhoff said, “the DDG price must decline about $6/ton, or 6%.”
Increased corn acreage results in sales of more seed, fertilizer and chemicals by related agribusinesses. As crop acres increase, farmers see increased costs in rental rates and farmland prices. Farm real estate values will increase by $39/acre, relative to the baseline, in 2015.
MU FAPRI uses computer models of the U.S. agricultural economy to run annual baselines projecting supply, demand and prices for commodities. The baseline assumes normal weather and continuation of current policy. From baselines, analysts run “what-if” scenarios to measure likely impacts of changes in legislated policy. Most FAPRI studies are on farm policy, but the models also work for energy analysis.The FAPRI report is available online at http://www.fapri.missouri.edu.