Adding more corn-based ethanol into gasoline will create a higher demand for corn, which will raise the price of corn. In short, it’s a recipe for disaster, according to three recent studies. A study by Advanced Economics Solutions concluded that corn prices “will be much higher and more volatile” if corn-based ethanol production increases. If corn acreage “does not grow significantly” more than half of the corn crop in the U.S. “will be diverted from food and feed to fuel if corn ethanol production grows to 22.1 billion gallons.”
The AES study cites three factors that contribute to increased ethanol production:
1. A $4 billion a year tax credit to gasoline refiners who blind corn ethanol into gasoline
2. A tariff that limits the importation of sugar ethanol
3. The slow development of advanced biofuels
Corn prices since 2005 have doubled, and a study by FarmEcon LLC blames the “increased demand for corn ethanol.” The cost of corn crop in 2008 was $2 per bushel over the 2005 crop, which is a $24 billion annual cost increase. The report forecasts the cost of corn in 2010 increasing “by another $1 per bushel, or $12.4 billion in total.”
A Food and Agricultural Policy Research Institute study reached the following conclusions about ethanol production:
1. Both ethanol production and corn prices would be reduced if the ethanol tax credit or ethanol tariff were allowed to expire. If the credit expired, corn prices from 2011 to 2018 would fall by 0.6 percent, and 2.8 percent if the tariff expired.
2. Ethanol production and corn prices would tend to reduce of biofuel use mandates were reduced.
3. Policy options reducing biofuel support when corn prices are high can slightly moderate corn prices.
4. Allowing 15 percent ethanol blends would increase ethanol use and corn prices, but only by an average of 1.1 percent.
As California goes, so should the nation
In April, the California Air Resources Board (CARB) voted in favor of a low-carbon fuel standard, the first in the U.S. The new standard requires the carbon footprint of fuels to be reduced 10 percent by 2020, and would limit the use of corn-based ethanol. It will take effect January 2011.
In 2007, California Governor Arnold Schwarzenegger slammed the federal government’s subsidies for corn-based ethanol, and the tariff on imported ethanol, which discourages “cheap fuel imports coming from Brazil.” He characterized both the subsidies and tariff as making “absolutely no sense, it’s crazy.” He called for the “free market, not government” to make the decisions about renewable fuels, and said “that is exactly what our Low Carbon Fuel Standard does.”
Now that the fuel standard is in place, the U.S. corn-based ethanol industry essentially lost its biggest market. Car-crazy California has essentially taken it off the market. There is an old saying, “As California goes, so goes the nation.”