February 20, 2008
Big Corn Ethanol Industry Even Without Subsidies

The corn ethanol industry would be only a third smaller without government subsidies.

One of the most dramatic aspects of the ethanol "revolution" is a ballooning percentage of corn crops being made into ethanol, which prior to 2004 had always been lower than 10 percent. This year, for the first time, ethanol replaced exports to become the second largest use of the grain behind that of domestic animal feed. With a fixed subsidy in effect, the amount of corn used for ethanol increases from 12 percent for $40 oil to 52 percent for $120 oil, the model predicts. With the renewable fuel standard, the ethanol share is quite stable, ranging from 44 percent for $40 oil to 47 percent for $120 oil, Tyner said. With the fixed subsidy in effect, ethanol production ranges from 3.3 billion gallons a year at $40 oil to 17.6 billion gallons with $120 oil, according to Tyner. The variable and no-subsidy policies yield 6.5 billion gallons at $80 oil and 12.7 billion for $120 oil.

As the price of oil goes up the price of corn will follow. The rise in the price of corn will pull up prices of other grains as farmers shift their fields to corn and they produce less of other grains. Peak Oil means high food prices.

Share |      Randall Parker, 2008 February 20 09:33 PM  Energy Biomass


Comments
odograph said at February 21, 2008 4:52 AM:

"The corn ethanol industry would be only a third smaller without government subsidies."

Great, so let's do this thing.

rsilvetz said at February 21, 2008 8:33 AM:

Uh no... that's not how it works. There are issues of economies of scale, there are issues of inventory replacement, return on capital invested per unit time and last but not least -- fuel mandates. Without subsidies and mandates, the whole thing would collapse as the house of cards it is.

odograph said at February 21, 2008 9:01 AM:

Ssshhh. Rslivetz, we are going to get rid of the subsidies because they are not needed.

Lorne said at February 21, 2008 4:07 PM:

It's interesting see that even though corn ethanol production has taken off in the past few years and grain prices have been rising, US corn exports haven't fallen off at all. They have stayed fairly constant at about the same 2 billion bushel range they've been at since 1980 and last year increased to 2.45 billion bushels. I guess this shows that the Asian countries want to eat meat and dairy products and are prepared to pay extra for corn and other grains to get it.

It also should be noted that most ag exports are sold in US dollars. The US dollar has collapsed against most other currencies (50% against the Canadian dollar since 2002) in recent years. This means that even though the price of grains in US dollars has gone up substantially, the growth rate hasn't been as dramatic when converted to other currencies.

While people need to eat more than they need to drive grain prices will continue to be high as long as oil prices remain high. Food markets can outbid the ethanol market for grain but ethanol will now set the base price. I think that whenever grain surpluses start to build and prices waver the surplus will vanish into the fuel industry and keep grains prices stabilized.

Randall Parker said at February 21, 2008 8:16 PM:

Lorne,

Interesting facts about corn exports. The US trade deficit is going to get balanced with higher priced food.

The higher the price of oil gets the stronger the price supports on corn. The more Asia develops the higher the price of food.

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