The US Senate votes earlier this month that were for and against continuation of the nation’s ethanol policy indicated the political split over the controversial subsidy program that is designed to enhance ethanol production and foster a declining reliance on petroleum. The 45¢ per gallon tax credit that goes to blenders helps reduce the cost of ethanol, and the 54¢ tariff is designed to reduce the importation of foreign ethanol. While Members of Congress feverishly work to re-appropriate the $5 billion spent on ethanol supports among other ethanol programs, it becomes more apparent the subsidies will disappear. If that happens, what will happen to corn prices, ethanol demand, soybeans, and all of the economic dynamics set in motion by ethanol?
The Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri put its economic models in motion to provide answers to Congress about the impact that the subsidies have on agriculture. The FAPRI report examines a number of policy scenarios, however the ones that will rise to headline status will be those that show the result of subsidy elimination at the end of the calendar year when they are set to expire.
An expiration of the ethanol supports creates a continuation of ethanol production, but a slowdown in the rate of increased production. As corn production increases with higher yields, the excess does not become consumed by ethanol, but adds to the carryout stocks and is reflected in exports and domestic production.
The ten year FAPRI forecast for that scenario keeps planted corn acres at the 89 million acre level, and with yield increases up to a 184.5 bushel per acre yield, production climbs from 13.6 bil. bu. in the coming marketing year to 15 bil. bu. by 2020-2021. Corn being refined for ethanol increases from the current 4.9 bil. bu. to 5.6 bil. bu. in 20/21. Ending stocks will double, exports will grow by 20%, but farm prices will only be at $4.70 when the ten year period ends, but revenue per acre will edge over $500.
The disappearance of the ethanol subsidy program will have a small impact on soybeans, although acreage will remain static at 77 mil. and yield grows slowly from the current 43 to 48 bu. per acre with total production reaching 3.7 bil. bu. The domestic crush will slowly grow with the increased production, and exports will likely be locked at 1.6 bil. bu. Ending stocks will remain steady at 170 mil bu. or less, and farm prices will remain in the 11 dollar range and revenue per acre will grow slightly, but remain under the $400 per acre mark.