[Updated March 2, 2017]: What would a world with another five billion bushels of corn on the market look like?
I am willing to bet that the grain growers among our readership just felt a small blood pressure spike at the very thought, anticipating dramatically lower crop prices.
That figure represents the portion of the U.S. corn crop converted to biofuels annually. However, the world’s oil producers and refiners have made it more than clear they’d love to see that stop.
The oil companies have attacked the mandates as wasteful, unnecessary, a subsidy by another name, and the fuels themselves as inferior energy sources that could be damaging to engines. They’ve also challenged the assertion they’re environmentally friendly.
Proponents have responded the industry creates jobs, lowers harmful emissions and keeps a portion of the US$1 trillion spent on motor fuel annually at home rather than shipping it overseas to unfriendly regimes.
Like all political fights, both sides seem intent on presenting the facts in the most positive light possible to make their case. But making their case both sides are.
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It’s become enough of an issue that even former U.S. agriculture secretary Tom Vilsack, a noted biofuels proponent, recently fretted publicly about their future. In an editorial board meeting with the Des Moines Register just before Christmas, Vilsack said he’s begun to see mixed signals about the U.S. Renewable Fuels Standard, predating even the contentious U.S. election. Vilsack even went so far as to indicate he’s “concerned” about the future of the U.S. biofuels mandate.
The Trump administration’s appointments to key cabinet positions haven’t been much source of comfort. The newly elected president has nominated two fierce renewable fuel foes to key positions — former governor of Texas Rick Perry has been tapped to head up the Energy Department and Oklahoma Attorney General Scott Pruitt is slated to run the U.S. Environmental Protection Agency.
There’s little doubt an elimination, or even just a reduction, in the U.S. biofuel mandate would be disastrous for the grain sector. When the mandates became reality with the U.S.’s Energy Independence and Security Act of 2007, the effect on grain prices globally was immediate, pronounced and extremely positive. Between 2006 and 2008 average world prices for rice rose by 217 per cent, wheat by 136 per cent, corn by 125 per cent and soybeans by 107 per cent, according to USDA data.
In the ensuing years, farmers around the world have responded to that price signal like they always do. They’ve upped their game, made investments to grow their productivity, and met that demand. In 2006, the U.S. produced 10.5 billion bushels of corn. In 2016, it produced 13.6 billion bushels, according to USDA data.
Similar, and even greater, production increases can be seen in other locations around the world. Ukraine corn yields, for example, have more than doubled in the last 15 years. They’re a relatively small producer, but that figure underlines just how much potential there has been to increase yields globally.
We’ve seen very similar results in other crops as well. The Black Sea region, once a major grain importer under the Soviet system, has become a fiercely competitive wheat exporter. Presented with the first meaningful price signal since shaking off the shackles of that moribund economic system, farmers there responded by quickly adopting technology and genetics to spike yields.
It’s too soon to say for sure that the U.S. mandate is doomed. Plenty of people support the policy, and the renewable energy industry is finding its feet in the lobbying game and inevitable propaganda war. Vilsack himself had earlier predicted there would be a lot of sabre-rattling but no concrete action, and despite his growing alarm, that may still be the case.
But it is clear that the policy is back in play and must be protected. In Canada there’s only been a few shots fired so far, but the industry will need to respond, or risk being overlooked.
There’s little anyone on this side of the border can do to influence the U.S. decision, so the best course of action is likely going to be hoping for the best while preparing for the worst.
That means playing defence, keeping a careful eye on the bottom line, and using current conditions to prepare for future challenges.
For example, interest rates remain very low, so paying off debt now might make a lot of sense. Another similar wind at the back of the sector is the lower value of the loonie. It has lost about 25 per cent of its value, protecting Canadian farmers from lower global grain prices.
What the sector shouldn’t do is blithely assume the mandates will continue forever. If recent geopolitical events have taught us anything, it should be to expect the unexpected.
[Update] The editorial originally stated ‘400 million’ bushels of corn at the opening sentence. An error in calculation required a numerical update to ‘five billion.’ We apologize for any confusion this may have caused.