There seems to be a big push to roll back the ethanol mandate, at least temporarily, due to the crop losses and high prices for corn, soybeans and wheat we're experiencing this year. See, for example, Colin Carter and Henry Miller's Op Ed in the New York Times.
How much would a temporary suspension of the mandate affect prices?
As I write, the future price for corn delivered in December 2012
is $7.95/bu. The price for delivery in December 2013 is just $6.30.
So, there is no incentive to store commodities, and inventories are very
low. So, any reprieve on the demand side will push directly on this
year's price. With regard to prices, it would be equivalent to reducing
the size of crop losses. If we lose 1/3 of the crop from heat and
drought, and we reduce demand by 1/3 by temporarily halting ethanol
production, we'd probably go back to early-Spring prices of around
One problem with this back-of-the-envelope
calculation is that ethanol production is unlikely to stop completely
just due to a temporary suspension of the mandate. There are shutdown
and startup costs, and a 10% ethanol blend is firmly in place.
So prices probably wouldn't fall back that far, but they would fall a
In fact, I wouldn't be surprised if
speculation about a temporary
suspension of the mandate is already folded into
futures prices, at least partly. It's hard to know what the odds of a
repeal might be, but the market knows it's not zero. And
the worse are crop losses, the greater the odds of a temporary
What's more subtle and potentially more interesting is
that temporarily repealing the mandate would set a precedent that would
affect futures prices and inventory demand going forward. It would be
interesting to evaluate an ethanol policy with a "safety valve" that
would relax the mandate in the event prices exceeded some threshold.
This kind of analysis is more difficult. Nam Tran, a grad student at
NCSU, is working on it. I'll post his results here if and when he has
(Cross-posted on GGG)
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