WWW.ERS.USDA.GOV/AMBERWAVES
MARKETS AND TRADE
Ethanol Reduces Government
Support for U.S. Feed
Grain Sector
The surge in the use of corn in ethanol production is
increasing the price of corn received by producers, thereby
reducing the income support received by the Nation’s feed grain
sector. In the past decade, a large share of farm support has come
from income support programs, such as marketing loan benefits,
market loss assistance or counter-cyclical payments, and produc-
tion flexibility or direct payments. Now, however, market rev-
enue, stimulated in part from renewable energy policies and
strong energy prices, is increasing in importance to the sector.
Ethanol demand for corn is raising feed grain prices above
farm program support levels, thereby reducing or eliminating
marketing loan benefits and counter-cyclical payments. For exam-
ple, the season average price received for corn was $2 per bushel
in marketing year 2005, but the projected price for marketing year
2006 is $3.20 per bushel, as of March 2007. In the 2005 market-
ing year, income support for feed grains totaled $10.5 billion,
coming from marketing loan benefits, counter-cyclical payments,
and direct payments. In marketing year 2006 and the next sever-
al years, stronger prices are expected to reduce income support to
include only direct payments.
The size and speed of the increase in corn’s use in ethanol
production is unprecedented in its effect on the U.S. feed grain
market and its implications for other agricultural markets.
Nonetheless, there are risks in the ethanol market outlook.
Ethanol production is expected to continue to grow and exert
pressure on the agriculture sector but its growth rate depends on
several factors, including oil prices, ethanol prices, feedstock
costs, changes in technology, and changes in government incen-
tives and policies. The use of corn in ethanol production could
also decline for several reasons, and thereby mitigate pressure on
the agriculture sector. For example, crude oil prices (gasoline
prices) co