farmgate: Is The Bio-fuels Industry Ready To Cut The Government Apron Strings?
The ethanol driven corn market has caused many livestock producers to wince at feed costs, and grumble about tax credits and other government incentives that have benefited the ethanol industry. Calls for a more level playing field have been frequent, not only from some livestock organizations, but also policy critics of the ethanol industry. As the Farm Bill is being re-written debate will increase over whether the ethanol tax treatment should continue when it expires in several years. What if it did expire? Would the bio-fuels industry be hurt, and what would that do to commodity prices?
The answers to those questions are offered by agricultural economists at the University of Missouri’s Food and Agricultural Policy Research Institute, in their new study on Economic Impacts of Not Extending Bio-fuels Subsidies. during the past spring, both the National Cattlemen’s Beef Association and the National Pork Producers Council called for Congress to not renew the 51¢ blender’s credit on ethanol as well as the 54¢ per gallon tariff on imported ethanol. FAPRI looked at the impact of that action, as well as eliminating the $1 bio-diesel tax credit, “The ethanol tariff and biodiesel tax credit are set to expire in 2008, while the ethanol tax credit is set to expire in 2010. In the scenario, the export tariff and biodiesel tax credits are removed beginning January 1, 2009 and the ethanol tax credit is removed on January 1, 2011. The renewable fuels mandate set by the Energy Act of 2005 is assumed to remain in place. “
In summary, the outcome has a number of different elements:
• On average, ethanol production declines by 3.75 billion gallon or 30 percent from the baseline forecast and wholesale ethanol prices fall $0.29 per gallon (17.8 percent) with the removal of the tax credit.
• The implied retail price of ethanol increases by 12.5 percent due to the decline in ethanol production. E85 responds less in this scenario because ethanol prices rarely fall low enough to make it competitive.
• Ethanol imports increase an average of 160 million gallons (49.4 percent) compared to baseline levels.
• While one might expect a larger increase in imports with the removal of the export tariff, the magnitude is limited by the decline in domestic wholesale ethanol prices.
• Ethanol dry mill net returns to fixed investment drop to $0.04 cents per gallon down $0.15 from the baseline average. This net return stops investment in ethanol plants since the average fixed costs of investment is approximately $0.24 cents per gallon.
• Corn prices decline by $0.30 per bushel due to the reduction in ethanol processor demand.
• With lower corn prices and less competition from distillers grains, corn feed demand increases by 6.8 percent (400 million bushels) while export demand increases by 16.9 percent (400 million bushels also).
• Corn exports are more price elastic than corn feed demand which results in a larger proportional increase in exports.
• Corn planted acreage falls by 3.38 million acres to 86.5 million acres driving down corn production by 520 million bushels as corn prices weaken relative to other crops.
• Wheat and soybean acreage increases by 0.54 and 1.10 million acres, respectively. CRP acres also increase by 0.65 million acres while 1.11 million marginal acres do not remain in production.
• Bio-diesel prices fall an average of $0.95 per gallon with the elimination of the $1.00 per gallon tax credit. The bio-diesel industry is more heavily dependent on the tax credit because of tighter profit margins than the ethanol industry bio-diesel production falls 53.9 percent or 270 million gallons from the baseline.
• With vegetable oil prices very sensitive to additional demand, average bio-diesel returns were marginal even with an extension the tax credit in the baseline. Without the tax credit, bio-diesel returns and production decline sharply.
• Soybean prices fall an average of $0.49 per bushel with an expansion in soybean area due to less competition from corn and a 21.7 percent decline in soybean oil prices. Meal prices increase by 8.3 percent with less competition from distiller’s dried grains and stronger demand from the livestock sector.
• Lower feed prices stimulate livestock production with beef, pork, and broiler production up 0.2 percent, 0.4 percent, and 0.3 percent, respectively. Fed livestock prices are marginally weaker with more production, but feeder steer prices are 0.5 percent higher. Lower feed costs would, all else equal, increase profits feedlots resulting in higher input prices (feed steer prices) and lower output prices (steer prices) when markets adjust.
• The scenario indicates that annual government costs decrease by an average of $6.5 billion if fuel taxes credits on ethanol and biodiesel are permitted to expire, while expenditures on farm programs expand by $0.57 billion.
• The elimination of the tariff also has a small effect on government outlays for farm programs, reducing marketing loan payments and countercyclical payments by a marketing year annual average of $0.34 billion and $0.23 billion, respectively.
• Farm income falls by $3.1 billion per year on average despite a reduction in expenses of $3.9 billion per year. Interestingly, both crop and livestock receipts decline as additional livestock production is more than offset by lower livestock prices.
• Average land values are $75 per acre lower under the scenario, falling to an average of $2,670 per acre compared with $2,746 per acre in the baseline. Land rents are also lower with a decline in rent to non-operator landlords of $1.7 billion.
• Consumer prices are marginally lower with a 0.1 percent decline in the consumer price index for food under the scenario.
Summary:
With the higher corn prices resulting from ethanol production, livestock producers and other critics of government incentives have questioned the need for continuation of financial benefits for the ethanol industry. If they expire, a domino-style of impacts occur which contract the ethanol industry by 30%, and with less demand for corn to refine into ethanol, significant changes occur in commodity prices, livestock feeding, land values, and even a small decline in consumer food prices. Essentially, the study indicates the bio-fuels industry is still dependent upon continued government support, and while that continues, related industries will be impacted to some degree.
Posted by Stu Ellis on June 5, 2007 12:43 AM to farmgate