WASHINGTON, (Reuters) - The U.S. government in recent years has not needed to prop up grain farmers' income with subsidies, but those payments could come roaring back if the lower ethanol mandate proposed last month drives corn prices lower, as many analysts expect.
The likely change to the Renewable Fuel Standard (RFS) comes as lawmakers are in the final stages of deliberations on a new five-year farm bill.
The bill is expected to abolish a direct subsidy payment made to farmers, which costs about $2 billion a year, in favor of a system that guarantees crop revenue and offsets falling prices. And if prices fall too far, those revenue support payments could spike.
Corn prices have dropped as farmers this year produced a record large U.S. crop of almost 14 billion bushels. The Environmental Protection Agency's proposal to trim the amount of biofuels mixed into gasoline next year would be another blow.
Chicago corn futures on Nov. 29 traded as low as $4.13 per bushel, just above the three-year low of $4.10 3/4 set on Nov. 19. Futures are down about 40 percent this year.
Season-low prices are typically set at harvest, after which values creep higher. But some analysts fear prices could stay at these low levels for months.
"If we get good crops, we're going to have way lower (market) prices and ... then you're looking at huge outlays," agricultural economist Bruce Babcock of Iowa State University told Reuters. "To me, that is the more interesting result of ratcheting up these subsidies."
From the Agriculture Department to leading think tanks, experts foresee lower corn prices, in the mid-$4 range, for the rest of this decade - dramatically lower than the record $6.89 a bushel set by the drought-shortened 2012 crop.
The outlook assumes continued normal yields leading to bumper crops and ample, even burdensome, supplies.
The EPA, in its annual rule making, has proposed a target of 15.21 billion gallons of biofuels use in 2014. A final decision will be made in the coming weeks.
Corn-based ethanol might account for 12.7 billion to 13.2 billion gallons of that, compared to this year's mandate of 13.8 billion.
A 56-pound bushel of corn yields about 2.8 gallons of ethanol. The smaller ethanol guarantee could shave demand for U.S. corn by about 2 percent, or around 285 million bushels in the 2013/14 marketing year.
The reduction in usage by ethanol plants would be offset somewhat by smaller output ofdistillers grains, an ethanol co-product that competes with corn as a livestock feed.
Like Babcock, Patrick Westhoff, director of the think tank Food and Agricultural Policy Research Institute (FAPRI) said that lower ethanol demand would hurt corn prices, the end-product of which would be higher government payouts.
"That is definitely the direction," said Westhoff.
RUN OF STRONG GRAIN PRICES ENDING?
A seven-year run of strong grain prices reduced U.S. crop subsidies to minimal levels - a significant savings to taxpayers. The rise in ethanol production has been a big factor in supporting corn prices.
Market prices for major crops like corn and soybeans have for years been far above the levels where support prices come into play. Support prices, also called target prices, assure a minimum price for a crop and act as an income stabilizer.
The farm bill, if passed in its current form, would establish a plan to provide up to 90 percent of average revenue from a crop.
Backers say it is needed to safeguard farmers' revenue from volatile market prices and high production costs.
For example, the drop in farm-gate prices from $6.89 a bushel for the 2012 corn crop to $4.50 forecast by USDA for the 2013 crop would be the largest one-year decline in six decades.
Corn subsidy payments would be triggered if the average farm-gate price is significantly below $4.50 a bushel, analysts said. If those prices sink to $4, "huge payments" would be needed, said Westhoff.
Agricultural economic professor Daryll Ray of the University of Tennessee says the next few years will test if there is a cash price "plateau" in the mid-$4 a bushel range for corn, or if market value lies lower than that.
From late 2008 to mid-2010, the most recent period of lower prices, corn futures traded roughly between $3.00 and $4.50.
With a record crop in the bin, "if spring 2014 planting goes well, prices could go lower yet," Ray said in a policy review on Nov. 15.
Back-of-the-envelope calculations put potential corn subsidies at $2 billion or $3 billion a year. But Babcock and Westhoff said the picture is still evolving. Large export demand could support prices, they said, and the impact of low prices, it they occur, would not be uniform.
The revenue guarantees of the new farm bill will be tied to local results, not a centralized price like Chicago futures. "The distributions matter," said Westhoff.
The cost of the farm bill, now in the hands of a select group of House and Senate negotiators, will be calculated on a "baseline" from early this year, when congressional forecasters penciled in higher average commodity prices. The recent drop in market prices will not alter the estimates of cost savings under the bill.