Ethanol Reduces Government Support for U.S. Feed
Grain Sector
Linwood
Hoffman
The surge in the use of corn in ethanol production
is increasing the price of corn received by producers,
thereby reducing the income support received by
the Nation’s feed grain sector. In the past
decade, a large share of farm support has come from
income support programs, such as marketing loan
benefits, market loss assistance or counter-cyclical
payments, and production flexibility or direct payments.
Now, however, market revenue, stimulated in part
from renewable energy policies and strong energy
prices, is increasing in importance to the sector.
Ethanol demand for corn is raising
feed grain prices above farm program support levels,
thereby reducing or eliminating marketing loan benefits
and counter-cyclical payments. For example, the
season average price received for corn was $2 per
bushel in marketing year 2005, but the projected
price for marketing year 2006 is $3.20 per bushel,
as of March 2007. In the 2005 marketing year, income
support for feed grains totaled $10.5 billion, coming
from marketing loan benefits, counter-cyclical payments,
and direct payments. In marketing year 2006 and
the next several years, stronger prices are expected
to reduce income support to include only direct
payments.
The size and speed of the increase
in corn’s use in ethanol production is unprecedented
in its effect on the U.S. feed grain market and
its implications for other agricultural markets.
Nonetheless, there are risks in the ethanol market
outlook. Ethanol production is expected to continue
to grow and exert pressure on the agriculture sector
but its growth rate depends on several factors,
including oil prices, ethanol prices, feedstock
costs, changes in technology, and changes in government
incentives and policies. The use of corn in ethanol
production could also decline for several reasons,
and thereby mitigate pressure on the agriculture
sector. For example, crude oil prices (gasoline
prices) could decline, feedstock costs could rise
further, ethanol’s price premium to gasoline
could disappear, or technological breakthroughs
could lower alternative feedstock costs to compete
with corn.
This
finding is drawn from . . . |
| Feed
Grains Backgrounder, by Linwood Hoffman,
Allen Baker, Linda Foreman, and C. Edwin Young,
FDS-07c-01, USDA, Economic Research Service,
April 2007. |
|
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