By Jon H. Harsch
© Copyright Agri-Pulse Communications, Inc.
WASHINGTON, April 21 – If ethanol could sue, it might have a case for taking the grocery-livestock-petroleum industry coalition to court over slander. That's because the much publicized “Food versus Fuel” debate may be based on manufactured myths rather than economic realities. According to a new report released this week by Iowa State University’s Center for Agricultural and Rural Development (CARD), rigorous economic analysis shows that “the contribution of ethanol subsidies to food inflation is largely imperceptible in the United States.”
The CARD ethanol report authored by Bruce Babcock and Jacinto Fabiosa responds to ethanol critics who charge that the sharp run-up in corn prices in recent years has been largely driven by increased ethanol production – and that the corn-ethanol combination has been the driving force behind higher food prices and higher livestock feed costs. This contention has led to continuing efforts in Congress to bring a legislative end to ethanol supports – the Renewable Fuels Standard (RFS) and the ethanol blender’s Volumetric Ethanol Excise Tax Credit (VEETC). In response, the report states that “While we cannot rerun history to see what corn prices would be like today without ethanol subsidies, we can rewrite history in a computer model to estimate what impact subsidies have had on market prices.”
Using the same agricultural sector model used for the Environmental Protection Agency to estimate land-use changes from biofuels, CARD researchers concluded that “the general pattern of corn prices that we saw in the historical period – increasing prices in in 2006 and 2007, a price spike in 2008, followed by a sharp price decline in 2009 – would have occurred without ethanol subsidies or even if corn ethanol production had not expanded.”
CARD's model shows that “Using the 2004 corn price of $2.06 per bushel as a reference, actual corn prices increased by an average of $1.65 per bushel from 2006 to 2009. Only 14 cents (8%) of this increase was due to ethanol subsidies. Another 45 cents of the increase was due to market-based expansion of the corn ethanol industry. Together, expansion of corn ethanol from subsidies and market forces accounted for 32% of the average increase that we saw in corn prices from 2006 to 2009. All other market factors accounted for 68% of the corn price increase.” Those other factors include high oil prices, low corn prices, and “the phase-out of MTBE, a source of oxygenate for gasoline made from petroleum.”
As an example of the complex relationships affecting ethanol production and corn prices, the report also concludes that “If there had been no mandate or tax credit from 2005 to 2009, ethanol processing margins would have been lower because both policy tools work to increase the price of ethanol that plants receive. Lower processing margins, in turn, would have decreased the incentive to invest in ethanol plants, which would have held down ethanol production and the demand for corn. Lower corn prices would have resulted in fewer acres being planted, and consequently in somewhat higher corn prices. . . These results show that most of the change in corn prices that we have seen is not due to ethanol expansion but rather is due to other forces at work.”
Among the report's other findings:
● “Corn prices in 2007 were $2.14 per bushel higher than they were in 2004. Of this amount, Figure 7 shows that about $0.30 per bushel of this increase was due to ethanol expansion caused by subsidies and $0.14 per bushel was caused by market-based expansion of ethanol. Fully $1.69 of this increase was due to other factors.”
● “A combination of cheap corn and high-priced ethanol was the primary driver that caused investment, not subsidies. This implies that ethanol subsidies have played a minor role in determining the size of the corn ethanol industry. Thus, ethanol subsidies have contributed little to corn prices or to food price inflation.”
● “On average, expansion of ethanol from market forces increased the corn price by about $0.45 per bushel. However, while there is no doubt that expansion of ethanol increases corn prices, it is wrong to attribute all of the increase in corn prices we have seen since 2004 or 2005 to ethanol. The pattern of corn prices that we saw from 2005 to 2009 would still have occurred even if corn ethanol production had been capped at 2004 levels.”
To read the complete CARD report on “The Impact of Ethanol and Ethanol Subsidies on Corn Prices: Revisiting History,” click HERE.
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