Rationing the 2012 corn crop revisited
The projected average farm price for each scenario uses the USDA price projection for the 2011-12 marketing year as a starting point and applies an estimate of the total price flexibility coefficient reported in a recent article by Mike Adjemian and Aaron Smith found here. Good and Irwin use their flexibility estimates for the current era of large ethanol use. Specifically, they use an estimate of -3, which, in order to be conservative, is approximately equal to the upper end of the 95% confidence limit (smallest in absolute value) of their flexibility estimates for the current time period. This estimate implies that for each 1 percent change in total supply the average price changes by 3 percent in the opposite direction.
In central Illinois, the current forward bid for harvest delivered corn is near $7.90, but has recently been above $8.00. The balance sheet alternatives presented here suggest that corn prices are now likely high enough to ration the 2012 corn crop if production is near or above the USDA’s current projection. Higher prices, and in some scenarios much higher prices, would be expected if production is less than the current projection in order to initiate more aggressive rationing in the livestock sector.
In closing, Good and Irwin underscore the critical assumption about ethanol demand made in this analysis. If alternatives to ethanol can be made available in sufficient quantities at competitive prices, a partial waiver of the RFS mandate, for example, might result in much lower consumption of corn for ethanol than assumed here and reduce the amount of rationing required in the domestic livestock industry.