Booming commodities: How long will it last?

Who would have thought that we would once again see $3 corn and$10 soybeans? Iowa farmers have not seen such price strength since 1996 for corn and 1974 for soybeans. At the same time, Iowa hog prices have strengthened in recent months; egg prices have more than doubled in the last two years; and cattle prices would be at record highs if U.S. export markets had not closed down as a result of the mad cow disease scare. Even so, cattle prices have hovered around $85.</p

Whither Farm Policy?

Under conditions that saw farm policy come under increasing criticism in the fall of 1999, this paper asks readers to take a closer look at what farm policy should accomplish. Babcock describes the various interest groups calling for farm policy reform, reviews three reasons for implementing farm policy, recounts the history and programs of the FAIR (Freedom to Farm) Act, and proposes policy alternatives that would allow for the agriculture industry to be flexible and competitive

Welfare Effects of PLC, ARC, and SCO

The late Gary Becker (1930-2014), winner of the prestigious Nobel Prize in Economics and the Presidential Medal of Freedom, was a theorist who developed explanations for common phenomena not normally associated with economic inquiry. He analyzed drug addiction, crime, and family structure among many other topics. Of particular relevance to farm policy and the development of the Agricultural Act of 2014 is Becker’s (1983) theory of political competition between rent-seeking pressure groups which predicts that policies that have enough political support to be adopted will tend to have two attributes

Outlook for Ethanol and Conventional Biofuel RINs in 2013 and 2014

The US ethanol industry faces numerous challenges over the next two years. The 2012 drought sharply increased corn prices, so profit margins will be low until least the 2013 corn crops are harvested. A saturated ethanol market means that ethanol mandates that are scheduled to be implemented in the next two years can possibly be met only if ethanol prices are heavily discounted. Thus, profit margins will continue to be low even if production costs fall after the next crop is harvested. In addition, buyers of ethanol can draw on blending credits they have accumulated over the last few years in lieu of ethanol to meet their obligations under the Renewable Fuel Standard (RFS). These banked credits are called RINs (Renewable Identification Numbers) and allow the Environmental Protection Agency (EPA) track how much renewable fuels are being used. When domestic consumption of ethanol exceeds mandated levels, the surplus RINs can be banked to meet future mandates. This policy brief provides insights into how the next two years will unfold in the ethanol market by focusing on whether the supply of banked RINs will be used in 2013 to help offset current high production costs or in 2014 to help offset low ethanol prices. The guiding principle of the analysis is that owners of banked RINs will use them when they have the greatest value. This principle implies that RINs will be used in 2013 until their 2013 value is equal to their expected value in 2014. The analysis indicates that because of the E10 blend wall and high ethanol production costs, a significant portion of banked RINs will be used in 2013. If, as seems likely, imported sugarcane ethanol is used to meet the portion of the advanced biofuels mandate that is not met by biodiesel meeting its own mandate, then almost all the banked RINs should be used in 2013. This result assumes that corn yields return to trend-line levels in 2014. If sugarcane ethanol is not imported to meet the advanced mandate, then fewer banked RINs will be needed in 2013 to offset heavily discounted ethanol prices. Whether sugarcane ethanol is used or not, the fundamental market forces indicate that RIN prices will be low in both 2013 and 2014. The ability to use banked RINs increases the feasibility of meeting the 2013 and 2014 mandates and is what keeps expected RIN prices low in both years. Low future prices are why conventional biofuel RIN prices are so low today. This result, though, depends on the assumption that heavily discounted ethanol will incentivize significant amounts of additional ethanol consumption from owners of flex fuel vehicles or by an unexpectedly large and rapid movement to use of E15. If this additional consumption does not materialize, then it seems that EPA will have no choice but to waive conventional ethanol mandates in 2014 because mandated consumption will exceed the ability of consumers to use ethanol as a fuel. Such a waiver, were it to occur, would also validate current low RIN prices

ACRE: Price Support or Crop Insurance?

Although farm programs and crop insurance programs are increasingly similar, one feature continues to differentiate them: crop insurance programs use prices that refl ect market conditions at sign-up time, whereas farm programs do not. Crop insurance programs must use current price information to set guarantees to keep farmers from moving into or out of the program based on whether revenue guarantees are more or less likely to generate a payout. Because the government does not ask farmers to contribute toward meeting the costs of farm programs, there is less fi nancial need for the programs to refl ect current market conditions. But the lack of infl uence of current market conditions on the prices used to set farm program guarantees often means that these programs will offer too little or too much support to farmers

Intricacies of Meeting the Renewable Fuels Standard

Consumption of biofuels is scheduled to ramp up to 36 billion gallons over the next 13 years if the timetable set in the Renewable Fuels Standard (RFS) is to be maintained. To ensure that fuel blenders meet this volume, the Environmental Protection Agency (EPA) uses the market for biofuel RINs (Renewable Identifi cation Numbers) to create a suffi cient incentive

Re-Energizing Supply Chains

The Internet is fast becoming the focal point for new investments in agriculture. Venture capital is funding Internet startup companies that want to transform the way business is conducted in agriculture; and traditional agricultural suppliers and processors are making online investments. But what is likely to be the outcome of such investments

Preliminary Assessment of the Drought’s Impacts on Crop Prices and Biofuel Production

Drought has sharply decreased the size of the US corn and soybean crops this year. While there is no way of knowing for sure how low yields will go, the continuation of hot and dry weather in the major corn and soybean producing areas indicates that yield losses could be of historic proportions. The potential economic impact of low yields—particularly corn yields—is heightened this year because of a low buffer stock of corn, and because 10 percent of our motor fuel supply comes from corn. This briefing paper presents preliminary estimates of the economic impacts of low US corn and soybeans yields. The impacts are estimated for the 2012–13 crop year that begins on September 1st. Because we do not know what future yields will be or what future gasoline prices will be, we make the preliminary estimates using a stochastic partial equilibrium model. This type of model solves for market-clearing prices for a large number of random “draws” of yields and gasoline prices. The model is calibrated to information that is available to us at the current time, including the USDA’s supply and demand projections and the level of futures prices for gasoline, corn, and ethanol

Odds of an ACRE Payment for Corn and Soybean Farmers

The recent sharp drop in commodity prices has increased producer interest in the new farm bill program called ACRE (Average Crop Revenue Election). If the prices currently indicated by the futures markets for the 2009 crop actually materialize, then corn, soybean, and wheat farmers have a good chance of receiving substantial ACRE payments. Farmers have until August 14 to enroll in ACRE so there is still time for farmers to determine if ACRE is better for them than traditional farm programs

Agricultural Policy Update: Are FAIR’s Payment Formulas Fair?

Once again, Congress will provide U.S. farmers with emergency aid. On June 21, 2000, President Clinton signed a bill that authorizes $7.1 billion in farm assistance, most of which will be distributed according to existing payment formulas. The label emergency allows Congress to bypass its self-imposed budget restrictions on extra farm aid. In the Corn Belt this year’s emergency will be a big crop and low prices— and not, as previously feared, a small crop and high prices