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Biofuel Mandate Sends Ripples Through Farm Sector

by 5m Editor
3 August 2007, at 10:05am

US - A federal mandate to use more biofuels, as passed in the U.S. Senate version of the energy bill, would shift more crop acres into corn, boost corn prices, reduce soybean acreage, cut livestock production and have repercussions across all of agriculture.

The mandate increases cash receipts for corn farmers, but it also increases their expenses through higher land and input costs and lowers their federal commodity supports.

By placing a floor under the demand for biofuels, the mandate could increase prices for ethanol and biodiesel.

The mandate for biofuels will encourage farmers to plant an additional 2.3 million acres of corn by 2015 when the mandate is in full effect. That acreage increase comes mostly at the expense of soybean production.

This analysis is in “Impacts of a 15 Billion Gallon Biofuels Use Mandate" from the University of Missouri Food and Agricultural Policy Research Institute (MU FAPRI.) The 33-page report compares changes under the mandate with a January 2007 FAPRI baseline under current law.

The report does not consider other provisions in Senate Bill 1321, such as the 3 billion gallon annual increase in required use of “advanced biofuels” such as cellulosic ethanol after 2015, said Pat Westhoff, MU FAPRI policy analyst and author of the report.

The increased demand for biofuels increases prices paid to plant operators by an average of 25 cents per gallon, or a 16 percent increase. The floor under ethanol demand assures investors in ethanol plants a more stable financial environment.

For farmers, crop cash receipts could go up $3.7 billion in 2015. However, net farm income, the money remaining to spend, increases by less than half, or $1.6 billion.

By 2015, an additional 898 million bushels of corn, above baseline, would be required to meet ethanol requirements. That demand would boost corn prices by 20 cents a bushel, or a 6.6 percent increase. Soybean prices also would increase, as soybean acreage and production drops. That price increase would make soy biodiesel less competitive and production could fall slightly.

In spite of changes to agriculture, the report shows only small price increases for consumers. U.S. food expenditures may go up $817 million, an increase of 0.1 percent relative to the baseline. “That is less than $3 per person per year,” Westhoff said.

The biofuel mandate passed the U.S. Senate but has not been taken up by the House of Representatives. The bill doubles the current mandate of 7.5 billion gallons by 2012.

The Senate mandate would result in an additional 2.4 billion gallons of ethanol, or a 19 percent increase above the current policy baseline. Domestic production makes up most of the increase, but imports also would increase.

If petroleum prices remain high or increase, the demand for ethanol may exceed the amount mandated, Westhoff said.

Livestock producers, especially those feeding corn in finishing rations, will see increased costs of production. This may result in what Westhoff calls a “modest decline in livestock, poultry and dairy production.”

Reduced production leads to higher prices for fed cattle, hogs, chicken and milk, but those go up less than 2 percent relative to baseline prices.

“Feeder steer prices decline marginally as higher feed costs lead to lower bids from feedlot operators, in spite of higher fed cattle prices,” Westhoff said. Higher meat and poultry prices result in slightly lower domestic consumption and reduced exports.

For consumers, meat prices will increase about a cent a pound relative to the baseline in 2015.

In addition to producing ethanol, the plants also produce dried distillers grains (DDGs) used for livestock feed. That coproduct will increase by 6.6 million tons by 2015, relative to baseline.

Presently, the price of DDGs follows the price of corn. As supplies increase, prices will drop, relative to corn. “To encourage increased use as livestock feed,” Westhoff said, “the DDG price must decline about $6 per ton, or 6 percent.”

Increased corn acreage results in sales of more seed, fertilizer and chemicals by related agribusinesses. As crop acres increase farmers see increased costs in rental rates and farmland prices. Farm real estate values will increase by $39 per acre, relative to the baseline, in 2015.

MU FAPRI uses computer models of the U.S. agricultural economy to run annual baselines projecting supply, demand and prices for commodities. The baseline assumes normal weather and continuation of current policy.

From baselines, analysts run “what-if" scenarios to measure likely impact of changes in legislated policy. Most FAPRI studies are on farm policy; but the models also work for energy analysis.

FAPRI, a part of the MU Agricultural Experiment Station, is funded in part by the U.S. Congress to provide independent study of proposed legislation.

To view the FAPRI report, please click here

5m Editor