Agricultural Commodities and the U.S. Ethanol Mandate

If none of the corn used for biofuel production can be recycled, the ethanol mandate will increase world food prices by about 30 percent.

In Identifying Supply and Demand Elasticities of Agricultural Commodities: Implications for the U.S. Ethanol Mandate (NBER Working Paper No. 15921), Michael Roberts and Wolfram Schlenker note that the inflation-adjusted price for an annual diet of 2000 calories a day for one person from rice, corn, wheat, or soybeans generally has trended downwards since 1915. However, following the 2005 U.S. Energy Policy Act, which mandated that 7.5 million gallons of ethanol be produced by 2012, and the 2009 U.S. Renewable Fuel Standard, requiring that 11 billion gallons of ethanol be blended into U.S. gasoline, corn prices nearly quadrupled to $8.00 a bushel. Prices for rice, wheat, and soybeans rose by similar amounts. The question is how much the US mandate affected world food prices.

The authors use temperature and precipitation data from the Climate Research Unit at the University of East Anglia to estimate weather related yield disruptions as well as deviations from a yield trend, which they then use to derive new elasticities for the worldwide crop supply. World production and storage data from the Food and Agriculture Organization suggest that the United States produces 42 percent of the world's corn. It produces roughly 23 percent of the combined worldwide caloric production of corn, wheat, rice, and soybeans. The 2009 Renewable Fuel Standard was equivalent to mandating that roughly a third of U.S. 2007 corn production, equivalent to about 5 percent of total world caloric production from the above four basic commodities, be used to produce fuel rather than food. The authors estimate that if none of the corn used for biofuel production can be recycled, the ethanol mandate will increase world food prices by about 30 percent. If one third of the caloric input is recycled as distiller's grain, all estimates scale back one third.

Farmers would respond to these higher prices by producing more though, mainly by increasing the amount of land under cultivation. Total worldwide caloric production could increase by as much as 3.5 percent. At current levels of productivity, this would require adding an additional 19 million acres to the 80 million acres currently used for corn production in the United States. If the increased output were to be drawn from less productive agricultural areas, then the increase in farmed land would be larger. For example, Brazil would require almost three times as much farmed land as the United States to produce a 3.5 percent increase in caloric production from corn.

The authors estimate that the "resulting expansion of agricultural growing area potentially offsets the CO2 emission benefits from biofuels."

-- Linda Gorman

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