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Northwest Iowa Dairy Outlooks

A local discussion of current science and issues concerning dairying in northwest iowa

The Environmental Protection Agency (EPA) has been asked to waive the biofuel use mandates, or Renewable Fuel Standard (RFS). This action could reduce demand for agricultural feedstocks to be used to make biofuels, potentially offsetting some of the impacts of the 2012/13 drought and reducing crop prices relative to what would occur without a waiver.
The analysis is based on the FAPRI-MU model that includes biofuel and agricultural commodity markets. The point of comparison is an updated FAPRI-MU baseline that takes into account low yields for certain crops, including corn, due to the drought, and the assumption that current policy is continued into the future. The baseline assumes no waiver of the RFS in response to the drought. Analysis reported here estimates the effects of a waiver on agricultural and biofuel markets.
Analysis compares the agricultural and biofuel market outcomes with the mandate waived against the baseline. Key results include the following:
• Reducing the overall RFS has a small negative effect on the corn price in 2012/13 relative to the baseline because overall ethanol use and production are projected to be motivated mostly by crop and fuel market conditions in the current marketing year, not the RFS. Waiving the mandate, a minimum use requirement, has limited market impact if people were going to use almost as much as the mandate anyway.
• A waiver in 2012/13 may have larger negative impacts on corn market prices in 2013/14 than in 2012/13. Extra biofuel use in one year typically can help to meet the next year’s mandate. If this practice is permitted, a waiver in 2012/13 could make it far easier to satisfy the RFS in 2013/14, when limits on E10 blending make mandate compliance difficult. If the waiver also disallows counting biofuel use in 2012/13 against the mandate in the next year, then the mandate might be more difficult to meet in 2013/14. In this case, corn prices in the year after the waiver would be higher than in the baseline.
• Waiving the advanced mandate reduces sugar cane ethanol imports, leading to more corn starch ethanol production and a higher corn price in 2012/13.
• More generally, mandate changes can have partly offsetting ethanol trade impacts. Reducing domestic use of corn starch ethanol tends to cause more exports. Reducing imported advanced ethanol tends to cause less exports.
I have said over and over again- the price of corn is effected by the price of a barrel of oil more than by ethanol production.

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