Wednesday, May 18, 2011

Corn Prices Higher Regardless of Ethanol

To hear critics of corn ethanol spin it, the reason corn prices are high is because of that mean ol' nasty ethanol.

But the facts and analysis from economists just don't support that skewed thinking.

Corn prices would have done about the same thing with or without ethanol.

That's the conclusion of a recently released report from the Iowa State University Center for Agricultural and Rural Development (CARD).

The analysis by Bruce Babcock and Jacinto Fabiosa showed that general pattern of corn prices seen during 2006-2009—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.

It also showed that investor speculation for corn ethanol in 2005, 2006, and 2007 would have occurred even without subsidies due to a combination of cheap corn, a phase-out of MTBE, and higher crude oil prices which made ethanol profitable. Thus, ethanol production would have expanded quite rapidly even without subsidies.
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 36% of the average increase that we saw in corn prices from 2006 to 2009. All other market factors accounted for 64% of the corn price increase.

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