What is in this article?:
- Ethanol Subsidies: To What Extent Do They Influence Corn Prices And Food Prices?
- Price without subsidies
Here is a quiz: Raise your hand if you think subsidies are responsible for high ethanol prices and that ethanol is responsible for high corn prices. OK. Now, raise your hand if you think there is no correlation among subsidies, ethanol prices and corn prices. All right. Now remember your answer and follow along with the latest research about subsidies, corn prices and ethanol prices and whether or not they are linked.
You may or may not be surprised at the answer, which comes from an in-depth study at the economics of corn, ethanol and governmental subsidies, which comes from the Iowa State University Center for Agriculture and Rural Development and economists Bruce Babcock and Jacinto Fabiosa. They say the controversy about ethanol subsidies spills over into the price of food, and critics of ethanol contend its subsidization has resulted in higher food prices. And they add that all of the issues have linkage because higher corn prices can result in higher food prices, particularly for meats. Ethanol prices have been a function of blending mandates by the federal government, the phase out of MTBE – which caused ethanol to be the sole supplier of oxygen in motor fuel – and the fact that oil prices are high. Additionally, the demand for feed drives corn prices, and that demand can be traced backwards to population, the economy and other dynamics. The challenge for the economists is separating all of the dynamics to determine their impact on the value of corn and ethanol.
To determine the price of corn they evaluated the market fundamentals affecting corn prices in 2008, which had an average of $4.06/bu. Going backward, they determined the price of corn from 2005 to 2009 without the ethanol blender tax credit and if Congress had capped ethanol production at 2004 levels. Those indicate the proportion of ethanol production in response to the mandates and the role that non-ethanol economic forces had on corn prices.
What all was happening in the corn market beginning with the 2006 crop year? The economists say that was the point at which construction of ethanol plants expanded substantially, corn acreage and yields were lower than expected and global grain prices rose from shortfalls in production. Investors in ethanol plants before 2008 were seeing a return on investment that covered construction costs in the first year of operation. That was a result of inexpensive corn and expensive ethanol along with higher oil prices and a continuation of the ethanol subsidies. When oil prices dropped in late 2008, both corn prices and refining margins declined. Corn prices kept pace with the volume of corn ethanol was consuming through 2009, even as corn yields increased and total corn supply increased.