Ethanol cut may drive down U.S. corn prices, drive up subsidies

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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.



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.

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NE  |  December, 02, 2013 at 07:42 AM

The oil people attack the No 1 new wealth producers in the USA .Shame on the NCBA and the other livestock for being part of this fraud.

MI  |  December, 02, 2013 at 12:56 PM

Not wealth producers Mel. Wealth redistributors. Taking tax money from hard working middle class Americans and distributing it to large landowners, Monsanto, Pioneer, etal. You can keep believing the lies from Farm Bureau and the NCGA, but the taxpayers are finally getting it figured out. It has nothing to do with energy security (saving us from foreign oil) since it takes the same amount of oil to grow the corn, ship the corn, process the corn, etc. It has everything to do with expanding markets for corn. When will you people be ashamed of the handouts you have been taking?

In  |  December, 02, 2013 at 02:02 PM

Wait a minute there Dan. Yes, the Ethanol industry has received subsidies over the years, but you can multiply that many times for the fossil fuel industry. I am talking about the royalties that the US government waived when oil companies went drilling in the gulf of Mexico several years ago...all the tax abatements they receive when they want to put up a new gas station. Also, the Trillions, not billions that our Government has paid the US Military to escort crude oil tankers over the last several years. Ethanol is a bargain when you compare it to fossil fuels.

South Dakota  |  December, 02, 2013 at 04:14 PM

If they do cut subsidies, then the Obama administration can say we are saving money and people from none farming states with more electoral votes will think it is a great thing until the cost of a steak or anything agricultural costs an arm and a leg. Then the Democrat's will swoop in and boost subsidies again and say Bush must have hurt the farmers and fix it as it must be the Tea Parties fault.

Michigan  |  December, 04, 2013 at 08:41 AM

I find it interesting that a group of ethanol millionaires may have to once again face the free market and their neighbors, and the children of their neighbors will have to support them with crop subsidies.

Michigan  |  December, 04, 2013 at 08:44 AM

Sounds like my kids. Well yeah maybe I got subsidies but so did the oil industry. First off no one is mandating how much oil must be used. Second be a free man and be brave enough to face the free market and demand all others do the same. Farming-Where socialism was born.

VT  |  December, 04, 2013 at 08:49 AM

Tom, there are no subsidies for diversified vegetable crops such as CSA farms, and yet I can afford to buy that food. I am in the middle class. If the food that is being produced with subsidies would not be affordable without subsidies, then why are we producing it? That is asking the American public to pay for something that can't support itself. This sounds very similar to welfare. Are you a fan of welfare?

Pa  |  December, 04, 2013 at 01:09 PM

I find this entire argument ridiculous... American citizens have the lowest percentage of income spent on good in the world. My family has dairy farmed for close to 100 years and work ourselves to 18 hour days through the summer and 12-16 hr days through the winter months.. American farmers are the best in the world and have enabled themselves to produce food so cheap that you, an American citizen, can afford wants like cellphones a new computer every year, a really expensive car, etc. I'm not saying I agree with subsides because I think we should slowly remove these from the governmental landscape... Also I am very disappointed in calling American agriculture like welfare.. American farmers work long hours and get paid below minimum wage when it is all figured at the end of the year... Welfare people get free cell phones free healthcare and also get paid for doing absolutely nothing all day every day. So before you start calling out American farmers I suggest you research more than what the news tells you. Thank you all god bless and have a merry christmas

montana  |  December, 04, 2013 at 02:53 PM

Lets not forget that our government uses our agricultural products as political tools against countries such as Cuba to try and change the way countries govern. If we could sell to anybody who wants our product I would say get rid of the subsidies. I think the majority of farmers and ranchers are like me and would just as soon not receive them. As far as buying something for the cheapest produced, it is that philosophy why we can't buy hardly anything made in the USA, except food, and communities are disappearing. The standards and scales in which our commodities are grown are second to none, This too comes at a cost to the taxpayer with all the regulations. Last I am sure people such as those who are against US. Agriculture can buy their groceries online from other countries sort of like what happens with most things these days.

Idaho  |  December, 04, 2013 at 09:05 PM

Those of us who feed animals are sick of Midwest farmers and politicians who rely on government subsidies. The whole ethanol thing was contrived by farm state politicians to get reelected and help their own. Everyone knows the carbon footprint of ethanol sucks.

montana  |  December, 04, 2013 at 10:24 PM

every livestock feeder I know uses byproducts such as distillers in their rations, I here it is even taking place of soybean meal in pig rations, so I am surprised that mike also has not found some benefits from the industry.

Pa  |  December, 05, 2013 at 06:16 AM

We have a small scale dairy farm milking around 90 cows and we have found the ethanol industry to benefit us rather than hurt us. The problem is when you rely on buying a of your feed, forages and grain you lower your competitiveness in the industry. Therefore you must be able to adapt to the changing marketplace and find better and cheaper ways of doing business. Over time the efficiency of making ethanol will improve and we can have a renewable fuel source that is very cheap, efficient and clean to produce and use in our vehicles.

MI  |  December, 05, 2013 at 08:30 PM

Well said, Dan!

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