As part of its ongoing review of the Renewable Fuel Standard (RFS), the House Energy & Commerce Committee recently asked stakeholders to comment on the impact of the RFS on the agriculture sector. One of the questions posed by the Committee asked whether, and to what extent, ethanol and the RFS have impacted corn prices. Our response to the Committee on that question? Yes, of course ethanol expansion has added value to corn pricesthat was the point!
Stimulating demand and enhancing the value of local crops was the principal motivation for the tens of thousands of farmers and other rural Americans who invested their hard earned money in the development of ethanol plants in their communities. And the role of the RFS was to create an environment of certainty that gave those investors the assurance and confidence they needed to finance the creation of a new distinctly American energy industry.
This does not mean, however, the RFS and ethanol expansion are the only driversor even the most significant driversof corn prices in recent years. Some meat groups and grocery manufacturers, who benefited for decades from corn prices below the cost of production, have incorrectly attributed all of the increase in grain prices since 2006 to ethanol expansion and the RFS. They conveniently ignore or downplay the dozens of other economic, policy, and weather factors (e.g., last years historic drought) that have contributed to higher prices for all agricultural commodities.
In any case, farmers arent the only beneficiaries of more valuable cropsU.S. taxpayers are reaping billions in savings annually thanks to the transition of the grain sector from a stagnating, surplus-driven marketplace to one that is vibrant, high-tech, and demand-driven. Federal farm program payments to corn growers are down dramatically since adoption of the RFS2, and farmers are now earning their income from the marketplace, not from the government. Not surprisingly, those critics who blame ethanol and the RFS for the entire corn price increase fail to simultaneously blame ethanol and the RFS for the big reduction in government spending on the farm program.
Between 1990 and 2006, producing corn was a losing business proposition. In all but one of those 17 years, the average farmers cost of producing corn was higher than the returns earned from selling the corn. In other words, corn cost more to produce than it was worth. As a result, U.S. grain farmers became increasingly reliant on government payments as a source of incomeand as a means of survival. Due in part to the emergence of the ethanol industry and the certainty provided by the RFS, this dynamic has changed.
Figure 1 below, based on detailed USDA data, shows the corn farmers average cost of production (orange line) compared to the price received for corn at harvest (blue line). We broke the production costs down on a per-bushel basis for the sake of simplicity. The market price for corn exceeded the cost of production only once (1996) between 1990 and 2006. In some years (e.g., 1993, 1998-2000, 2005), the cost of production was nearly $1 per bushel higher than the harvest price paid to the farmer.
Source: USDA-ERS Commodity Costs & ReturnsDue to sustained negative returns and artificially low corn prices from 1990-2006, many American farmers became reliant on federal farm program payments to stay afloat. As shown in Figure 2 below, government payments to corn farmers (depicted by the red line on a per bushel basis) often bridged the gap between steep financial losses and just breaking even (the blue line is profit/loss before accounting for govt. payments). In some years (e.g., 1998, 1999, 2005) farmers still took sizeable losses even after receiving large government payments.
Ironically, and as explained in this study by Tufts University, the primary beneficiary of crop subsidies during this time was not the farmer receiving the paymentrather, it was the livestock and poultry industries who were feeding corn priced well below the cost of production. The Tufts study found that from 1997-2005, government payments to corn farmers equated to a subsidy of $11.25 billion to the broiler chicken industry and $8.5 billion to the hog industry. The Tufts study shows companies like Tyson, Pilgrims Pride, Smithfield, Goldkist and Conagra saved billions of dollars in feed costs at the taxpayers expense. No wonder the livestock and poultry groups want to return to the days of $2 corn!
Source: USDA-ERS Commodity Costs & Returns; USDA-FSA CCC Budget Essentials
So, whats happened since passage of the Energy Independence and Security Act (EISA) and expansion of the RFS in 2007? The figures above show two clear trends since 2007: 1) corn prices have been above the cost of production, and 2) as a result, government payments have fallen precipitously. Though not reflected in the above figures (due to lack of 2012 cost of production data), government payments to corn farmers in 2012 are forecast to be their lowest in 18 years and less than one-quarter of 2006s outlays. As a consequence of the grain sectors economic resurgence, Congress is now considering sweeping changes to the Farm Bill that would further reduce the programs impact on taxpayers and the federal budget.
Again, the RFS and ethanol industry cant take 100% of the credit for these positive developments. But it is indisputable that the RFS and the emergence of biofuels have played a tremendously important role in this success story. As stated in our comments to the Committee, Girded by the RFS, ethanol has become the single most important value-added market for American grain farmers, stimulating investment in agricultural technology and enhancing economic opportunities for rural communities across the country. As a result, the net impacts of the RFS and ethanol production on the agriculture sector have been decidedly positive
