Corn prices don't faze ethanol production

When Congress signed the Energy Independence and Security Act into federal law in 2007, House Representative, Nick Rahall, stated the purpose of the act was to protect consumers and “increase the efficiency of products” among other things. But not quite four years later, the law, which promotes petroleum independence by backing alternative energy like ethanol, is pushing the markets to their threshold.

The law is skewing normal supply-and-demand within the commodities markets to the point that corn market prices are soaring and land availability is becoming scarce.

The pressures are due to the “inelastic” properties of the law, which mandates that 15 billion gallons of ethanol be consumed per year by 2015, regardless of what the price of corn is, and regardless of what the price of crude oil is.

"Corn could be $2 a bushel or $10 a bushel, crude could be $50 a barrel or $100 a barrel and that 15 billion gallons has to be there. That means ethanol production is totally unresponsive to price. There's no flexibility,” said Wally Tyner, energy policy specialist.

To reach the renewable fuels standard, about 27 percent of the nation’s corn crop must be devoted to ethanol this year, leaving other corn consumers to compete for the remaining 73 percent, according to the Purdue Department of Agricultural Economics.

Supply disruptions—known as “shocks” in economics—force prices higher than they might be in a typical supply and demand system, Tyner said. Corn shocks are no exception: The price for corn topped $7 a bushel in recent months.

Combinations of shocks are in effect:

• Atypical wet spring across the Corn Belt, which delayed planting and potential fall yields
• The weakening of the U.S. dollar, maintaining high foreign demand
• Political discord in the Middle East oil-producing countries that spiked oil prices this spring and made ethanol production more economically feasible
• Grain stocks falling to dangerously low levels (The USDA is estimating about a three-week supply of U.S. corn by the end of August, while five weeks of supply is considered adequate)

      While growers are enjoying high profitability, they may also be actively bringing corn prices back down. Farm Business Talk contributor, Canuck_2, predicts that, “All farmers will put just a little extra input into their crop because the prices allow it. Many will find just a little bit more land that they can plant and we 'the farmers' will bring prices down with a good if not bumper crop within 48 months.”

The other current effect of the law is on land availability. "In the U.S. we're about maxed out,” Tyner said. “There's little new land to grow corn. In 2008 when we needed more land for corn we got it from soybean acreage. When we needed more land for soybeans we got it from cotton acreage, and some from wheat. But now cotton prices are high, sugar is high, rice is high, corn is high, soybeans are high - everything's high. So there's no place to go within the U.S. for more land."

Tyner reported that since 2006, 66 million new acres of land have come into production for major agricultural crops globally, and another 27 million acres have shifted from other crops to corn, soybeans and rapeseed crops.

“Even with these added acres, prices are high because global demand from all sources, including ethanol, has grown faster,” Tyner said.

Some of the only survivors in the agriculture industry are livestock producers who can afford to pay more for corn now as pork prices are up 13 percent since 2008, and beef prices up 11 percent since then, Tyner said.

Others are calling on Washington to waive the ethanol mandate before prices climb higher, with knowledge that the Environmental Protection Agency has this ability if it is deemed that significant economic harm is occurring as a result of it. But Tyner says we’re not there yet.

“As long as oil prices are high and it’s profitable to produce ethanol, we’re going to keep doing it with or without the mandate, at least in the near term,” he said.

Source: http://www.agriculture.com/news/business/cn-prices-dont-faze-ethol-production_5-ar17360