Economists are often viewed as poor forecasters, but sometimes we get lucky—especially when government policies that are fairly obviously unsustainable over the long haul have been distorting prices in commodity markets. Such is the case with the price of corn, which is now falling. That fact has important implications for the costs of the farm subsidy programs being considered by the House-Senate conference committee on a new farm bill.
In 2012, in examining the Senate’s preferred new subsidy boondoggle, a “shallow loss” program called Agricultural Risk Coverage, Professors Bruce Babcock, Barry Goodwin and I estimated the likely costs of that program to the taxpayer in two price scenarios.
First, as the Congressional Budget Office (CBO) has typically assumed in computing its recent cost estimates for new farm subsidy programs, we based our estimates of program costs on the assumption that prices for major commodities such as corn, soybeans and wheat would remain at recent record or near record levels.
For corn, we followed CBO and assumed that prices would average about $4.70 a bushel over the life of a new farm bill (propped up by “industrial demand” for corn as an input into ethanol production). We calculated that, on average, corn producers would receive about $2 billion a year if corn prices remained at about that level. Total taxpayer costs of the Senate ARC program for all the major commodities receiving subsidies would be about $3.8 billion under this high price scenario.
Next, we assumed that crop prices would move downwards towards their long run trend levels and re-estimated the costs of the Senate ARC program assuming an average corn price of about $2.80 a bushel. In that price world, we estimated that the ARC program would pay corn growers about $4 billion a year. By the way, under the current Direct Payments program that sends farmers welfare checks for doing nothing (which the ARC would replace with, according to the Senate Committee, the goal of lowering government subsidies to corn growers), USDA estimated that corn growers would receive about $1.97 billion from taxpayers in 2013.
This year, in US markets, the price of corn has steadily declined from its average of $6.89 a bushel in 2012 to about $4.20 cents, a level would be likely to trigger ARC payments for corn producers measurably in excess of the current subsidies they receive under the direct payments program. Why the decline in corn prices? Four main reasons: corn acreage has increased (so more corn has come onto the market), technology innovations have increased corn yields over the longer term (again more corn for sale), growing conditions have been relatively good this year (as opposed to drought poor last year), and the ethanol industry’s demand for corn is shrinking.
One reason for the decline in the ethanol industry’s demand for corn is the recent roll back of the EPA ethanol use mandate for 2014, also known as the Renewable Fuels Mandate, by three billion gallons. This rollback is closely linked to the decrease in US demand for gasoline by that has taken place over the past three or four years. The other reason is that oil prices have declined, making corn based ethanol less competitive with traditional gasoline and ethanol production less profitable.
What does the future hold for corn prices? Further rollbacks in the renewable fuels mandate appear quite likely, especially for corn based ethanol, which has also lost its appeal to environmental groups as a means of reducing greenhouse gasses. And corn yields are likely to continue to increase because of technical change (in the form of higher yielding varieties that have shorter growing periods and can even be planted successfully in places like Montana were corn would never have been viable fifteen years ago). What does that mean for corn prices? They are likely to continue to go down. And what does that mean for subsidies to corn growers under both the farm bills proposed by the Senate and House Agricultural Committees: they will go up.
Today the focus is on corn, but what about the prices for other commodities like wheat and soybeans whose growers are also big time recipients of Direct Payments subsidies? Wheat prices, over the long run, are relatively closely linked to corn prices, because low quality wheat competes with corn in the animal feed market. Shrinking corn prices are likely to lead to shrinking wheat prices over the medium to longer term, which fairly quickly would mean wheat producers would receive substantial ARC payments or, if the House Bill’s Price Loss Coverage price support program were to become law, substantial subsidy payments under that program. Soybean meal is also an animal feed and so soybean prices are also somewhat related to corn prices, and are also likely to moderate.
How large could the total subsidy costs of the Senate and House new programs become? Much larger than the $5 billion in current annual taxpayer outlays under the Direct Payments: anywhere from as much as $7 billion to well over $10 billion a year, depending on which of the two programs built into the House and Senate bills were eventually included in a new Farm Bill.
The cold hard fact that corn prices are falling away from recent record levels appears to have had a salutary “wake up call” impact on the House and Senate Farm Bill conference committee proceedings. Yesterday, negotiations between House and Senate members came to a grinding halt, not least because the price of corn had fallen to $4.20 and the conferees and their staffs were faced with a genuine inconvenient truth. No legislator wants a new farm bill that will transparently spend more on farm subsidies than the current farm bill, especially given that overwhelmingly those subsidies flow to farm households that are much wealthier than the average taxpayer. And the corn market is letting the Farm Bill conferees and other members of Congress know that such is likely to be the case if they push forward with their preferred programs.
So, today, taxpayers and food consumers should all be grateful for the news about lower corn prices. Anything that gives the Senate and House Agricultural Committees a reality check about potentially wasteful farm subsidy programs should be applauded. That lower corn prices will eventually make eggs, meat, and breakfast cereals a little bit cheaper for all of us who eat food on a daily basis is just a very pleasant bonus.