The new US energy policy that was signed into law late in 2007 boosted the mandates for ethanol and bio-diesel, guaranteeing increasingly higher demand for corn and soybean oil in years to come. But while the targets for use are posted for all to see, the bio-fuels industry will wrangle with Congress in 2010 over extension of the 51¢ ethanol tax credit that have been a foundation block for the industry. Additionally, a tariff that restricts the importation of ethanol and a $1 tax credit for bio-diesel are set to expire later this year. If the tax credits expire or are extended, what will be the impact on commodity prices, bio-fuel use and price, and the rest of the farm economy?

Formally, the policy is known as the “Energy Independence and Security Act of 2007” (EISA) and it mandates that 15 billion gallons of corn-based ethanol be used by 2015, in addition to one billion gallons of bio-diesel used by 2012. Currently, we are at a point less than half of those targets, but corn is already at $5 and soybean oil is over 50¢ per pound. To help Congress understand the impact of its action and prepare for the debate over extension of the tax credits, economists at the University of Missouri’s Food and Agricultural Policy Research Institute (FAPRI) programmed their computers to analyze EISA.

The result was dozens of different economic variables within a variety of scenarios with and without the tax credits and tariffs. Among the more important to a corn and soybean producer are these, if the tax credits and tariff are extended:
1) From 2011 to 2016 there will be 1.1 billion more bushels of corn per year refined into ethanol than if EISA did not exist, with 30% of the demand resulting from increased production and 30% resulting from reduced exports. 40% would result from less livestock production.
2) Corn production expands by 2 million acres, but soybean production does not expand because of higher corn prices.
3) Corn prices increase by 8% ($3.37) compared to life without EISA and soybean oil prices increase by 36%, pulling soybean prices up by 9% ($7.25). Soybean meal prices fall with the increased supply and more ethanol means more distillers’ grains.
4) Higher corn prices result in slight reduction in livestock production, further resulting in higher prices for cattle, hogs, and milk.
5) Higher crop prices mean less government payments from 2002 Farm Bill-type programs.
6) Average feed expenses for livestock producers are unchanged because lower costs of soybean meal offset higher prices for corn.
7) Higher crop prices contribute to an increase in cash rent, as well as other production costs because of increased corn production.

If the ethanol and bio-diesel tax credits are allowed to expire, along with the ethanol tariff, much different economic scenarios occur with the EISA mandates:
1) Ethanol production averages only 8 billion gallons per year from 2011 to 2016.
2) Corn prices increase an average of 52¢, and 5 million additional acres are produced.
3) Wholesale prices for bio-diesel double and the large increase in production pushes soybean oil prices up 72%.
4) With higher commodity prices, revenue returns per acre are greater for corn, which causes soybean acreage to fall slightly.
5) Higher corn prices outweigh lower soybean meal prices, so the overall cost of feed impact livestock producers, particularly for hogs.
6) Higher commodity prices mean less government spending for price supports, including for CRP payments because some CRP land is shifted back into production.

Summary:
The new federal energy policy will result in more ethanol and bio-diesel production than would occur without it, and with high levels of bio-fuel production, there is both increased demand and increased production of corn and soybeans, with resulting higher prices for both. That scenario means less dependence on government programs, but with higher production costs, including land costs.