Rationing the 2012 corn crop - Are we there yet?
The projections also imply that ethanol production would eventually drop below the mandated level of blending. We calculate the mandated level for the 2012-13 corn marketing year at 13.6 billion gallons, which would require processing of about 4.9 billion bushels of corn. However, as noted in the discussion of assumption (7) part of that the mandate can be satisfied by accumulated RINS from production that exceeded the mandate the past two years. We estimate that maximizing the use of those RINS suggests that a minimum of about 3.92 billion bushels of corn would be required to meet the mandate. Under the demand assumptions in this analysis, an average yield much below 130 bushels would not provide adequate corn supplies to meet the mandate even making full use of the available stock of RINS credits. Such a situation would require more severe reductions in consumption in other categories (likely in feed use) or some partial waiver of the mandate. Nonetheless, it is still noteworthy how low the U.S. average corn yield can sink before the RFS mandate becomes binding and much more drastic adjustments are forced on other categories of use. This highlights the key role that the RINS credits are likely to play in the upcoming marketing year.
Implications for Price
What about the question posed at the beginning of this post? Is the current level of prices high enough to ration usage in light of substantially diminished expectations about supply? In central Illinois, the current forward bid for harvest delivery of corn is about $7.20. This is consistent with the scenarios where yield is between 135 and 140 bushels. If yield turns out to be above 140 then current prices would appear to be sufficient, and perhaps more than sufficient, to ration usage. An average yield of 135 bushels or less would require substantial further rationing, resulting in record high average prices. Under such a scenario, history suggests that prices may go well above the expected average price in order to initiate the additional rationing process. Prices have probably not yet gone high enough to accomplish the necessary rationing if the average yield is below 135 bushels.
In closing, it is important to emphasize that our analysis should be viewed for what it is—a simple, first take on what might happen under alternative corn yield scenarios. How actual market dynamics will be worked out is fraught with complexities. In particular, we are in uncharted territory regarding the interaction of the corn, ethanol, and gasoline markets in a major drought. This adds even more uncertainty to what is already an extremely volatile market situation.