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.