If the ethanol subsidies had not been in place, ethanol processing margins would have been lower, and lower margins would have reduced the incentive to invest in construction of ethanol plants. That would have held back ethanol production and the demand for corn. The economists say, “The fact that ethanol production would have expanded even without subsidies means that corn prices and corn acreage would have also increased. Corn prices without the ethanol subsidies would have averaged only 4% less over this period than what they were. Part of the reason why corn prices would not have seen a more significant decrease is that corn acreage would have been lower without the subsidies.”

Economists Babcock and Fabiosa say ethanol subsidies have contributed to higher corn prices and higher food prices. However, they say, “The largest difference in corn prices, in 2007, would have been 30¢/bu., or about 7%. This relatively small change in corn prices necessarily implies that the contribution of ethanol subsidies to food inflation is largely imperceptible in the U.S.” But they add that that does not mean the contribution of ethanol to food inflation is imperceptible.

Regarding corn prices, they contend, “The general pattern of corn prices would have been the same as in the historical period without ethanol subsidies or without expansion of ethanol, rising from 2005 to 2007 and then declining to 2009. Corn prices would have still risen dramatically in 2007, to $3.75/bu. … 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.”

The economists looked back at the $2.06 corn price in 2004 and the ethanol subsidy impact added only 30¢ of the $2.14 price increase to 2007 and another 14¢/bu. was added because of the market based expansion of ethanol. From 2006 to 2009, ethanol subsidies added 8% to the price of corn, with ethanol demand adding 45¢, for a total contribution of 36% of the price increase. And they conclude by saying, “…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.” And that the pattern of pricing for corn from 2006 to 2009 would still have occurred whether there was a subsidized ethanol demand or not.

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Summary

Conventional wisdom holds that ethanol subsidies inflate corn prices and that causes higher food price inflation. Researchers have separated the dynamics affecting corn prices and ethanol pricing to find the extent of any impact of ethanol subsidies on corn prices. They report that a relatively small portion of the increase in corn prices from 2006 to 2009 was due to ethanol subsidies and a slightly larger portion due to the demand for corn by ethanol plants.

 

(Orignially published by the University of Illinois farmgate blog.)