Updated Assessment of the Drought’s Impacts on Crop Prices and Biofuel Production

Bruce A. Babcock
August 2012  [12-PB 8]

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Suggested citation:

Babcock, B.A. 2012. "Updated Assessment of the Drought’s Impacts on Crop Prices and Biofuel Production." Policy brief 12-PB 8. Center for Agricultural and Rural Development, Iowa State University.

Executive Summary

On August 10th, USDA released updated estimates of the size of this year’s corn and soybean crops. Corn yields are now projected at 123.4 bushels per acre, which combined with a drop in projected harvested acres results in an estimated crop size of 10.8 billion bushels—down 17 percent from USDA’s July estimates. Soybean production is now estimated at 2.7 billion bushels—down 11.7 percent from July projections. The sharply lowered production estimates suggest the preliminary assessment of the impact of the drought on crop prices and biofuel production that I conducted last month needs to be updated.1 In the preliminary July assessment, I estimated that a waiver of the conventional ethanol mandate would reduce corn prices by an average of 4.8 percent across the 500 model outcomes considered. The now lower estimates of corn production imply that this estimated impact of a mandate waiver is too low. However, corn and soybean production are not the only economic variables that have changed in the past month. The average gasoline price used in the July assessment was $2.50 per gallon, which was the average futures price for reformulated gasoline. The average price of the futures contracts from September 2012 to August 2013 is now $2.78 per gallon—up 11 percent. Higher gasoline prices imply greater market demand for ethanol, which reduces a mandate waiver’s impact on corn prices. The net effect of higher gasoline prices and lower crop size on crop prices, and the impact of the mandate waiver, can only be determined by re-running the model used in my July assessment. The results from these updated model runs are presented here.