Posted: Thursday, August 23, 2012 11:00 AM
Analysis: Corn prices depend on variety of other factors
Waiving the Renewable Fuel Standard could reduce corn prices by as much as $1.30 a bushel or not at all, according to an analysis by the Farm Foundation and economists at Purdue University.
The federal mandate requires 13.2 billion gallons of ethanol be blended with gasoline this year. Livestock and dairy interests say the standard, in concert with drought in the Midwest, is driving up the price of corn and the cost of animal feed.
They've asked the Environmental Protection Agency to waive or reduce the standard for at least a year.
But economists say the connection between corn prices and ethanol production is complicated, and the ethanol market is complex.
Analyzing several scenarios, the Purdue team found that a waiver could reduce corn prices anywhere from zero to $1.30 a bushel.
The effects of a waiver depend on many factors, including oil prices, corn prices, final corn production, the flexibility of refiners and blenders and the potential use of renewable fuel production credits, which can be carried forward and applied to the annual requirement.
The analysis found refiners and blenders would have to have a positive economic incentive to change their current practices even if a waiver were granted, said Wally Tyner, a Purdue economics professor and energy policy specialist who led the analysis.
"Corn and ethanol would have to rise in price, and gasoline prices would have to fall," he said.
One critical issue is the flexibility of refiners and blenders to use or to choose not to use ethanol. And it's not clear how quickly the system could change, or if refiners and blenders would want to in response to a one-year waiver, he said.
If refiners and blenders can't or choose not to change, a waiver would have no effect on corn prices, he said.
The economists did find some scenarios that could reduce corn prices from their current level, which is exceeding $8 a bushel.
Reducing blending to 11.8 billion gallons of ethanol would reduce the corn price by 67 cents a bushel. Using accumulated credits for past ethanol production, estimated at 2.6 billion gallons, would also reduce corn prices about 67 cents per bushel with no EPA action on the RFS.
Reducing the blending from 11.8 billion gallons to 10.4 billion gallons, reduces the price of corn by about $1.12 a bushel, and reducing blending further to 7.75 billion gallons would reduce it by about $1.30 a bushel.
The economic harm of the drought -- tens of billions of dollars -- has been done, Tyner said, and the EPA can't change that.
It can only determine how that harm will be distributed among the affected parties.
The Purdue economists don't think EPA will grant the waiver, but say if it did it wouldn't help producers this year.
It's the bigger picture that concerns Meyer.
He and others have warned for years of what could happen when Mother Nature throws a severe weather event into the equation. By statute there's not a lot of flexibility in renewable fuels policy, he said.
Now, people are wringing their hands, saying "gee, we never thought about this," he said.
"We darn well should have thought about it because we've been living on borrowed time for some time," he said.