While corn growers are reeling from this year’s drought, an MU agricultural study has concluded that increasing the use of ethanol could raise corn prices.
The Energy Policy Act of 2005 requires that 7.5 billion gallons of renewable fuels be in use by 2012. The study, conducted by the University of Missouri Food and Agricultural Policy Research Institute, found that an increased demand for ethanol would raise corn prices by 12.5 cents per bushel nationwide during the next several years. This could benefit corn producers and have an impact on taxpayers, producers of other grains and the livestock industry.
“It should be very positive in terms of what it’s going to do for farmers, as well as what it’ll do for consumers,” said Gary Marshall, chief executive officer of the Missouri Corn Growers Association and the Missouri Corn Merchandising Council.
The study, funded by the U.S. Department of Agriculture, assumed that 7 billion of 7.5 billion gallons of the renewable fuel mandate would come from corn-derived ethanol produced in the United States. It also acknowledged that results are contingent on market factors and how the energy act is applied.
The study predicts that corn growers will see their net income increase. But federal subsidies are likely to fall, which could partially counteract the income growth. On average, the expected net income increase is projected at $8.80 per base acre, or less than 4 percent. Marshall said the increase is “what all farmers are hoping for.”
“We’re hoping that prices go up a little bit,” he said. “It’s going to increase farmers’ profitability ... and that’s why we all work, to put money in the bank.”
According to the study, taxpayers could enjoy a $1 billion per year savings between 2011 and 2015 because of reduced government payments. One example of the reduced spending is less assistance from the loan deficiency program, which makes payments to farmers when prices fall below a certain level. However, ethanol receives tax exemptions, so the government could lose some revenue as consumers use less gasoline and more ethanol.
Producers of other grains are also projected to benefit, as the increased demand for ethanol would reduce the corn surplus that typically fills other market needs.
“Prices for sorghum, barley, oats and wheat ... will probably increase just a little bit,” said Pat Westhoff, an economist with the MU research institute. “So for the producer groups, we have some pretty clear positives here.”
The change that could be felt by the livestock industry is minimal, averaging out to less than 1 percent. Although increased ethanol demand would consume more corn, it would also create more byproducts of ethanol production, which are used as livestock feed.
“If you’re close to an ethanol plant, you can obtain byproducts, which will be cheaper and more abundant,” Westhoff said. “If you’re farther away and have to rely on corn, it’ll be expensive. Some cattle producers will come out ahead, and some will come out behind.”
It would take years to build the ethanol plants needed to meet the demand, Westhoff said.
“It’s really like 2007, 2008 that this bill will start kicking in,” he said.
But Marshall said the prospect of rising prices due to ethanol is a positive thing, giving hope to farmers who have been dealt a blow this season with low prices and low yields.
“It’s the only bright spot in agriculture,” he said.