CARD Revisits History of Ethanol and Corn Prices

Cindy Zimmerman

A new report from the Iowa State University Center for Agricultural and Rural Development (CARD) revisits history to look at the impact of ethanol and ethanol subsidies on corn prices.

cardThe analysis by Bruce Babcock and Jacinto Fabiosa uses a computer model to “rewrite history” by re-creating what actually happened in agricultural markets then removing government incentives to produce and consume corn ethanol. To further isolate the effects of ethanol on commodity prices, they also ran a scenario where ethanol production was frozen at 2004 levels.

In summary, this is what they discovered:

First, 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. Second, investor fervor for corn ethanol in 2005, 2006, and 2007 would have occurred even without subsidies because a combination of cheap corn, a phase-out of MTBE, and higher crude oil prices 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 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.

Renewable Fuels Association
Vice President of Research and Analysis Geoff Cooper provides some thoughts on the CARD analysis in a new E-xchange blog post.

corn, Ethanol, Ethanol News, RFA