Corn Market Advances to Ration Squeaky-Tight Supply
Relaxing renewable fuels standard may not free up as much corn from ethanol and lower corn prices as much as livestock producers would hope.
Published: Jul 25, 2012
The corn market is ratcheting higher. It's striving to ration demand. A key question is which users will trim corn consumption to make the drought-shortened crop stretch.
Currently, most gasoline sold in the United States contains 10% ethanol. Even though gasoline prices are well off their spring high, fuel remains pricy by long-term standards. Gasoline prices and subsequently ethanol margins are key factors that will determine how much corn ethanol plants use.
In late June, Valero Energy idled ethanol plants at Linden, Ind. and Albion, Neb. Those shut downs might suggest ethanol will bear the brunt of the use adjustment.
Relaxing renewable fuels standard may not free up as much corn from ethanol and lower corn prices as much as livestock producers would hope.An analysis by Bruce Babcock, director of the Center for Agricultural and Rural Development at Iowa State University suggests ethanol may not cut use as much as other users, particularly livestock producers, might hope. He has prepared a briefing paper that presents preliminary estimates of the economic impacts of low U.S. corn and soybeans yields. The impacts are estimated for the 2012–13 crop year that begins on September 1.
"Because we do not know what final yields will be or what future gasoline prices will be, we make the preliminary estimates using a stochastic partial equilibrium model," explains Babcock. "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 in mid July, including the USDA's supply and demand projections and the level of futures prices for gasoline, corn and ethanol."
Corn yield assumptions. Much uncertainty remains regarding what U.S. corn and soybean national yields will be. On July 9, USDA projected that corn yield per harvested acre at 146 bushels per acre, which surely must be closer to the upper limit on corn yields because of continued hot and dry weather in the primary corn growing regions of Iowa, Illinois, Indiana and western Nebraska.
In the model, Babcock set the maximum corn yield at 148 bushels per acre. Average yield is set at 138 bushels per acre, and 120 bushels per acre is the lowest yield used. The 1988 yield loss, expressed as a percent decline from 1988 trend yield, was 25%. Applying this percent yield loss to the 2012 trend yield gives 122 bushels per acre.
"Combining the average yield, the maximum yield and the minimum yield with an assumed standard deviation of 5 bushels per acre is all that is needed to calculate the four parameters of the beta distribution used in this analysis," says Babcock. "Unfortunately, given the continued deterioration of the crop, we may be too optimistic about the size of this year's crop, but again, no way exists to really know at this time. Thus, interpret the results as being conditional on the assumed distribution of corn yields."
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Tagged: livestock, corn yield, usda, Drought, corn ethanol