Farm income declines while ethanol profits boom

By   /   February 25, 2014  /   No Comments

By Paul Brennan | Iowa Watchdog

DES MOINES, Iowa — Hard work and determination may be traditional ingredients for success, but they’re no match for having the federal government force customers to buy your product.

Consider these economic numbers.

Last week, the U.S. Department of Agriculture predicted farm income will decline by 27 percent in 2014.

This follows an 18.5 percent drop in farm income last year.

Major ethanol producers, on the other hand, released numbers this month showing the industry made record profits in the last quarter of 2013.

Industry analysts expect the first quarter of this year to be just as good, if not better.

The most obvious difference between these two sectors of the economy, both of which are important to Iowa, is that the federal government doesn’t force anyone to buy wheat or soybeans or other agricultural products.

But it does force gasoline refiners to buy biofuels, the vast majority of which is ethanol made from corn.

That mandate has become increasingly important for Iowa’s economy.

As the state’s agricultural production continues to recover from the drought conditions earlier in the decade, the weak national economy has yet to provide a great demand for the state’s supply of crops, driving prices down.

But the ethanol industry’s need for corn has continued to grow, which has helped Iowa’s farm economy — even though the price of corn has declined.

A TALE OF TWO ECONOMIES: As farm income continue to slump, the ethanol industry is enjoying a boom, thanks in large part to the federal government’s Renewable Fuel Standard.

The ethanol industry’s demand for corn should continue to grow, regardless of what else happens in the economy, since Congress has exempted the industry from the law of supply and demand.

The Energy Policy Act of 2005 created the Renewable Fuel Standard, which requires biofuels to be blended into the nation’s gasoline supply. The RFS specifies the amount to be blended in each year, with the amount steadily increasing until it reaches 36 billion gallons in 2022.

In November, the Environmental Protection Agency, which is responsible for enforcing the RFS, proposed reducing the mandated amount of biofuels in the gasoline for 2014 by 14 percent.

This is because gasoline consumption has shrunk since 2007, so keeping to the scheduled RFS increase might push the amount of ethanol above the 10 percent blend that is considered safe for all cars.

The EPA’s proposal immediately met with fierce bipartisan opposition from politicians in Iowa and other corn-belt states. The politicians claimed the proposed 14 percent reduction in the RFS mandate would cripple or kill the ethanol industry.

Of course it’s now obvious the politicians were predicting this catastrophe for ethanol while the industry was enjoying a record-setting quarter.

Economists don’t believe changing the RFS mandate by 14 percent would have much an effect on the ethanol industry.

Speaking last week at the USDA’s annual Agricultural Outlook Forum, the department’s chief economist Joseph Glauber said that even if the RFS mandate is adjusted, 2014 will be a good year for ethanol production. He also predicted a steady increase in ethanol production over the next 10 years.

The one real threat to ethanol production is a bill introduced in the U.S. Senate by Sen. Tom Coburn, R-Okla., in December.

The Corn Ethanol Mandate Elimination Act would do just what its name suggests: repeal the RFS and force ethanol manufacturers to compete in the free market.

Although the bill has bipartisan support—Sen. Diane Feinstein, D-Calif., was one of its nine cosponsors — virtually nothing happened after it was introduced.

“Dr. Coburn is working to get more cosponsors and hopes to get a vote on the bill soon,” Aaron Fobes, a spokesman for the senator told Iowa Watchdog. “The timing on a potential vote, however, is to be determined at this point.”

Most experts believe the bill has very little chance of passing, owing to the same solid political opposition the adjustment to RFS faces.

And now traders in ethanol credits are showing signs they believe that political opposition may have worked on the EPA as well.

Gasoline refiners can buy ethanol credits instead of actual ethanol to satisfy their required amount of biofuel purchases under the RFS. Speculators also buy and sell the credits.

Even before the EPA announced its proposed RFS reduction in November, the price of the credits dropped. Prices remained low until this month, when they began to climb again.

Writing on Farmdoc Daily, Scott Erwin, one of the few economists who closely follows the ethanol credits market, says this means “traders believe the odds of the EPA reversing (its position) … have increased sharply.”

Erwin points out that “the recent track record of the… market in signaling changes in EPA policy is quite impressive”.

Ironically, to find to this reassuring, supporters of the RFS mandate would have to believe in the efficiency of the free market.

Contact Paul Brennan at pbrennan@watchdog.org

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Paul Brennan