ECONOMIC & POLICY UPDATE
Commodity Markets and the Environmental Protection Agency BY CORY WALTERS he price of agricultural commodities is ultimately determined by supply and demand. Increased demand for corn from, say ethanol for example, puts upward pressure on prices. Increased supply from more acres or larger yield, while holding demand constant, puts downward pressure on prices. Consequently, factors influencing demand and supply play a direct role in producer profitability. Understanding these factors is important for corn (or soybean and wheat) producers’ strategic planning; especially for decision making surrounding the 2014 crop. Over the past 8 years, the demand for corn has increased and the primary demand driver has been expanded ethanol production (figure 1). Demand for additional corn in 2014 will be heavily dependent on the Environmental Protection Agency (EPA) pending ruling on the Renewable Fuel Standards (RFS) volumetric mandates for both renewable fuel and advanced fuel in 2014. The reason for the rule change is because 2014 RFS required production, in gallons, cannot be met for both advanced (i.e., cellulosic ethanol and biodiesel) and renewable (i.e., ethanol) fuels. The United States is consuming fewer gallons of gasoline (i.e., the blend wall). Therefore, fewer gallons can be blended (possible expansion surrounds E85 consumption) and current biodiesel production capabilities are far less than what the law mandates. The RFS law has already reduced the mandate for cellulosic ethanol required in 2013, from 1.0 billion gallons to a meager 0.006 billion gallons. However, the EPA has not reduced the overall RFS requirement or the requirement for advanced fuel. Consequently, the EPA is stuck deciding the fate of the RFS. Inexplicably, someone recently leaked the EPA’s ‘Proposed 2014 Volume Requirements’. In this leak, which
T The Agricultural Economics Department publishes the Economic and Policy Update towards the end of each month. Each issue features articles written by extension personnel within the department and other experts across the country. Topics will var y greatly but regularly include marketing, management, policy, natural resources, and rural development issues. If you would like to recieve this newsletter by email, please contact Kenny Burdine at kburdine@ uky.edu.
You can also view current and past issues online at http://www.ca.uky. edu/agecon/index. php?p=209 Co-editors: Kenny Burdine, Alison Davis, and Greg Halich
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is not final and subject to change, the EPA proposes to reduce total renewable fuel production from 18.2 to 15.21 billion gallons. This reduces advanced fuel from 3.8 to 2.21 billion gallons, and reduces renewable fuel from 14.4 to 13 billion gallons. This reduction translates into a decrease in demand for the use of corn in ethanol production, which will affect corn prices. Additionally, scaling back biodiesel requirements will limit future soybean demand for biodiesel production. As of today, the demand for additional corn for ethanol production and soybeans for biodiesel production will not continue to expand. Over the past 8 years, producers have attempted to keep up with the increased corn demand by growing larger crops. Throw the 2012 drought into the mix and over the past 8 years corn production has been less than total use in 5 of 8 years (figure 2). Only for this year’s crop, 2013, production has largely outpaced use. Have producers, via corn production, caught up to corn demand? And if so, will they continue to produce above what is needed? The answer to the first question
appears to be yes. The answer to the second question depends upon what the EPA decides to do with the RFS. Currently, there is no deadline for the EPA to make a final ruling on the RFS. Once the ruling is released, commodity markets will likely react very quickly. If the EPA does what was leaked and reduces the mandate, barring any major weather issues for 2014 corn production, then the answer is yes. Producers will, at least for 2014, produce above what is needed. The impact on price would be negative. Lower prices reduce insurance guarantees, thereby, increasing risk of income being less than costs. However, lower prices could trigger expansion in corn exports and/or domestic feed use, which would help support prices.
Cow Country News, December 2013, A publication of the Kentucky Cattlemen’s Association