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The Effect of the US Ethanol Mandate on Corn Prices

The Effect of the US Ethanol Mandate on Corn Prices

Full Title:  The Effect of the Ethanol Mandate on Corn Prices
Author(s):  Colin Carter, Gordon Rausser, Aaron Smith
Publisher(s):  UC Davis Department of Agricultural and Resource Economics
Publication Date: September 1, 2012
Full Text: Download Resource
Description (excerpt):

World food prices doubled between 2000 and 2011, and they have increased further in 2012 due to a severe drought in the midwestern United States. How much of this recent jump in food prices can be attributed to the increased use of food crops to produce biofuel? US legislation passed in 2007 requires that a large quantity of corn be converted into ethanol for fuel use. In fact, corn‐based ethanol production in the United States has quadrupled since 2005 and now uses 15 percent of all corn produced in the world. In this paper, we estimate what the price of corn would have been if no growth in corn‐based ethanol production had been mandated. Using modern time‐series methods, we estimate that corn prices were about 30 percent greater between 2006 and 2011 than they would have been without the mandate. We isolate the channels that generate this price increase, including an increase in corn storage in anticipation of ethanol‐production increases. We also estimate the extent to which ethanol production exacerbated the effects of the 2012 drought. We find that corn prices would have been about 40 percent lower in 2012 were it not for the mandate. As a result, the impact of US energy policy on global corn prices is considerable, particularly for the world’s poor.

 

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