Plenty has been written about the current farm belt drought—especially its effect on projections about this year’s corn harvest and their effect on price futures. By all accounts, it’s the worst U.S. drought in 50 years, some would suggest since the Dust Bowl days in the 1930s.
As USDA’s yield projections have continued to drop week by week, corn prices have increased nearly 60% since June, with prices now over $8 a bushel.
As a result, controversy has erupted, as farmers, producers and ethanol refiners battle over dwindling supplies. A consortium of livestock industry organizations is demanding that the federal government waive the mandate for ethanol inclusion in domestic gasoline.
The 2012 Renewable Fuel Standards mandates that oil companies blend 13.2 billion gallons of ethanol with the gasoline they produce. That would increase to 13.8 billion gallons in 2013. Under current rules, EPA has until October to determine the extent of any economic harm that might be created by continuing the RFS and to decide if the agency will issue a waiver.
The argument livestock representatives have raised is straightforward: Diverting corn to ethanol production means higher prices for feeders and producers, not to mention higher meat, poultry and dairy products that are more expensive for consumers. That seems intuitive: A waiver would seemingly reduce the demand and moderate corn prices.
Projecting the scenarios
However, according to a new study by Purdue University agricultural economists, corn prices might not necessarily moderate if the Environmental Protection Agency’s ethanol mandate were temporarily suspended.
The report, “Potential Impacts of a Partial Waiver of the Ethanol Blending Rules,” suggested that corn prices could fall under some scenarios should EPA grant a partial waiver of the Renewable Fuel Standard's corn ethanol provision—but only under certain market conditions, according to a news release from the university.
“The range of impact of an RFS waiver goes from zero to $1.30 per bushel for corn,” said Wally Tyner, an energy policy specialist and the report’s lead author.
Tyner and fellow agricultural economists Chris Hurt and Farzad Taheripour examined future corn and ethanol price scenarios with or without an RFS waiver, how crude oil prices could factor in ethanol use and what might occur if the drought worsens.
“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. “If the waiver resulted in less demand for ethanol that would, in turn, lead to lower corn prices than would have existed without the waiver. It also could lead to more ethanol plant closings—at least temporarily.”
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, Tyner said.
USDA now estimates that U.S. corn production will total only 10.8 billion bushels this year, down from 14.7 billion bushels, at prices averaging $8.20 a bushel. Should the drought strengthen and the EPA mandates 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 Purdue report.
But 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.
Should a waiver lead to reduced ethanol use, the 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. “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.”
Not only that but another conclusion seems obvious: Far from demonizing corn production as a waste of farmland, resources and food productivity, the crop is critical to much of the entire agricultural economy. Moreover, by now it should be obvious that turning corn into ethanol is not a long-term, sustainable solution to our energy needs.
All it takes is for weather or market conditions or global supply-and-demand issues to upset the balance among the many constituencies dependent on corn, and we’re no longer able to afford both robust use of corn in animal agriculture, food production and fuel refining.
Ethanol may offer some positive contributions to energy independence, but only as a transition strategy.
Long-term, maintaining the viability of the livestock industry trumps any short-term benefits we might derive from taking a critical feedstock and burning it up in our cars.
The opinions expressed in this commentary are solely those of Dan Murphy, a veteran food-industry journalist and commentator.