What would happen if recent proposals to increase the ethanol blend limit to 12.5% or 15% should come to pass?

For starters, the amount of ethanol produced would jump an additional 6 billion gals./year under the 15% scenario, a 57% increase over the 2009 Renewable Fuels Standard mandate of 10.5 billion gals./year, according to Mississippi State University (MSU) ag economists. And the commensurate increase in corn usage would be substantial.

In a Livestock Marketing Information Center “Analysis and Comments” report authored by MSU’s John D. Anderson, Daniel Petrolia and Josh Michael Riley, the economists found that blending conventional gasoline to 12.5% ethanol would require 13.63 billion gals. of ethanol and 4.958 billion bu. of corn.

“To explore impacts in the current and the upcoming marketing year, we assume that this increase in blending would begin in May,” the economists say. “Thus, corn use for ethanol production is shifted to 4.115 billion bu. in the current marketing year and to 4.958 billion bu. in 2009/10. These represent an 11% and 34% increase in corn devoted to ethanol production, respectively.”

Then the researchers looked at moving the blending limit to 15%, the proposal currently before EPA. “In that case, corn use to meet the full blend limit amounts to 4.442 billion bu. in the current marketing year (a 20% increase over current corn use by the ethanol sector) and 5.949 billion bu. for 2009/10 (a 61% increase).”

In the 12.5% blend scenario, compared with 2008/09, feed use in this model declined by about 5% by the end of 2009/10. For the 15% blend scenario, feed use is estimated to decline by almost 9% by the end of 2009/10.

“It should be pointed out that these adjustments would follow already sharp declines from 2007/08 feed use,” the researchers say. “Higher costs of production have led to ongoing contractions in the beef, pork, poultry and dairy sectors. A higher ethanol blend limit could add to the incentive for herd/flock reductions by keeping upward pressure on feed prices and ultimately contributing to higher prices for meat, poultry and dairy products at the retail level.”

The researchers add that the impact of higher corn prices on meat production will be mitigated by the increased availability of distillers grains byproducts. However, they say history has shown the ability of byproduct feeds to offset the effect of higher corn prices is limited.

“The bottom line is that byproduct availability will create some slippage between corn prices and meat production, but the general result that higher corn prices will lead to higher costs of production and reduced supply in the meat sector will hold for the foreseeable future. The potential impacts of even the smaller increase in blend limits are quite substantial, with the potential to deal a further serious blow to the nation’s livestock industries at a time when they are already struggling from an extended period of high costs of production and sluggish demand,” the report says.
-- Livestock Marketing Information Center