An agricultural economist says efforts in the United States to freeze or roll back the ethanol mandate would quickly put the brakes on soaring grain prices.
U.S. senator Kay Bailey Hutchison, chair of the Republican party’s policy committee, has filed legislation to freeze the corn-based mandate at this year’s level of 34 billion litres instead of continuing to 57 billion litres by 2015. The bill is cosponsored by U.S. presidential candidate John McCain.
“Freezing the mandate is in the best interests of consumers who cannot afford the increasing prices at the grocery store due to the mandate diverting corn from food to fuel,” Hutchison said.
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Texas governor Rick Perry has gone a step further, calling for an immediate 50 percent reduction in the renewable fuel standard, which would drop the mandate to 17 billion litres in 2008. The U.S. Environmental Protection Agency is considering the request.
The governor said the renewable fuel standard approved last year could drive corn prices to $8 per bushel in 2008, costing his state an estimated $3.59 billion US to the oil and cattle sectors.
Richard Perrin of the University of Nebraska-Lincoln said if these efforts were successful, it would have a dramatic impact on the global farm economy.
“If the level of ethanol production were capped at (34 billion litres) in the next few months I think it would have a substantial cooling effect on grain prices,” he said.
Perrin believes much of the increase in grain and oilseed prices has been caused by market speculators who are already anxious about prices. A development of that magnitude would be enough of a psychological jolt to bring down prices in a hurry.
Perrin recently published a paper in which he concluded ethanol is responsible for 30 to 40 percent of the doubling in grain prices over the past two years.
That impact would disappear if the U.S. government revisited its renewable fuel standard, but Perrin thinks that is highly unlikely.
“I just don’t think that’s politically and probably even constitutionally feasible given the amount of capacity that we are already constructing.”
U.S. ethanol capacity is 27.3 billion litres and another 23.5 billion litres are under construction at an estimated cost of $12.4 billion. Perrin said he can’t imagine how the federal government could put the brakes on that much economic activity, especially since it is taking place largely because of existing government policies.
So if the mandate stays intact, can growers expect a similar commodity price hike in the next couple of years?
Not likely, Perrin said. The doubling of grain prices in the past two years has prompted producers to pump more nitrogen into their crops and plow up more prairie than they have in the past. He said it is fairly easy to imagine world production increasing faster than pending ethanol demand.
“I am not bullish on grain prices over the next three to four years, even with the scheduled increase in ethanol construction.”
He’s also putting his money where his mouth is.
“I have a small farm and have sold next year’s corn.”
