Thursday, May 8, 2008

Corn Production and Ethanol

An article in yesterday's Financial Times reported:

Mr Glauber [chief economist for the Department of Agriculture] said that ethanol was likely to consume 24 per cent of the maize harvest.
That struck me as remarkable, so I looked into it a bit further. According to the IMF's 2008 World Economic Outlook, ethanol will actually consume 31% of the entire U.S. corn crop in 2008 (see Appendix 1.2, fn. 16). If the U.S. meets its mandate to quintuple ethanol production by 2022, then by 2015 ethanol will consume roughly 50% of the U.S. corn crop. The U.S. is far and away the biggest corn producer in the world. According to the Department of Agriculture, the U.S. will produce 332 million metric tons of corn in 2008. If 31% of the U.S. corn crop is being used for ethanol, that means ethanol will consume roughly 103 million metric tons of corn. World corn production in 2008 is estimated to be roughly 772 million metric tons. Thus, U.S. ethanol is consuming roughly 13% of the corn produced in the world. Ponder that for a second: U.S. ethanol is consuming roughly 13% of the corn produced in the world. How much would food prices go down if there was a 13% increase in the supply of corn used for non-ethanol purposes? I don't know. But I imagine it wouldn't be an insignificant price reduction -- especially for poor countries. Now, some of the 103 million tons of corn being used for ethanol wouldn't have been produced without the ethanol subsidies, so it's a bit unfair to fail to control for that factor. On the other hand, the increased corn production also puts upward pressure on other commodity prices. From the 2008 World Economic Outlook (pg. 60):
Biofuel demand has propelled the prices not only for corn, but also for other grains, meat, poultry, and dairy through cost-push and crop and demand substitution effects.
On balance, then, it's probably fair to say that in the absence of U.S. ethanol, the supply of corn used for non-ethanol purposes would increase by less than 13%, and that such an increase would lower prices across a wide range of commodities. The WEO also has these great charts on commodities:


Anonymous said...

Sir, how much field corn have you eaten? I only ask since that is the type of corn that is used to produce ethanol. 47% of corn is used for livestock feed, 24% for ethanol, 19% is exported and only 10% of the total US field corn production is actually used for some type of food. However, don't take my word for it. Check the US Dept. of Agriculture statistics. What does all this mean you ask? It means that $130/barrel oil is having an exponential effect on fuel prices when compared to the effect corn prices are having on food.

Economics of Contempt said...

Higher prices for corn raises the price of livestock feed, and higher prices for livestock feed ultimately raises food prices. And do you think the 19% of field corn that is exported just disappears? No, it's used for livestock feed, food, and yes, ethanol. So higher field corn prices raises food prices in the countries that import U.S. field corn. That U.S. ethanol policy raises food prices isn't exactly breaking news: it's been common knowledge for years now. I didn't make any specific claims about how much ethanol is raising food prices, I only said that the amount is probably not insignificant.

And I'm not really sure what you're claiming when you say that $130/barrel oil is the primary factor raising fuel prices. Of course $130/barrel oil is raising fuel prices. But that's a bit like saying high soda prices are raising the price of soda.

Anonymous said...

Why are the by products of ethanol ignored when they are used for feed. The dried and wet distillers grains make up nearly half of the corn that entered the ethanol process. This is a huge amount of feed that the anti ethanol forces alway ignore when they claim food is being kept from people. I believe the bottom line of corn being available has not lessened because of ethanol but held its own when the above factors are added back into the supply.

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