True or False: Ethanol Can Be Credited For The Current Price Of Corn?

There are some people who like ethanol and there are others who do not like ethanol. While it is wrapped in the American flag, it has its detractors, and there are an increasing number who blame ethanol for higher food prices. That is a jump over a sizable chasm, since the price of corn is in the middle of that leap. While higher corn prices may or may not have lead to higher food prices, ethanol demand has lead to higher corn prices. But by how much?

Ethanol production has grown exponentially in the past several years, and thanks to higher oil prices, ethanol refineries can remain profitable despite $6 corn prices. The 20% share of the US corn crop that went into ethanol last year will reach 30% in the coming year. However, the demand for corn to feed ethanol plants has created hardships for other users of corn. An estimate of the impact of ethanol on corn prices has been calculated by University of Wisconsin economists T. Randall Fortenbery and Hwanil Park.

Quite a few recent economic estimates have been offered:
1) 154,000 acres of North Dakota corn could be obtained for ethanol with an 11¢ premium.
2) 4.67 billion gallons of ethanol production by 2010 would raise corn prices by 18%.
3) Corn prices are 12.5¢ higher at ethanol plant sites.
4) Corn prices might increase 5¢ as much as 150 miles from an ethanol plant.
5) Corn prices would average $3 per bushel in 2014 if 14 billion gallons are produced.

Nevertheless, the Wisconsin economists look at the supply and demand factors in the corn market to develop the ethanol impact, by identify how each of the demand factors such as feed, seed, and exports individually affected the corn price. They determined that a 1% increase in ethanol production causes a 0.16% increase in the corn price in the short run. Applied to current prices, they said, “Since ethanol production capacity essentially doubled between the first two quarters of the last and current marketing years, the model results above suggest that ethanol’s contribution to the price rise was about 41¢ per bushel. This would have resulted in an average 2007/2008 first quarter price of $2.95 per bushel had nothing else changed.”

While $2.95 is much lower than corn prices actually were last fall, the economists believe that a competing demand from a hot export industry also contributed to the higher prices of last winter and spring. During that period, corn exports grew 15% over the prior year as USDA had to continually raise its estimates, and that added another 10¢. But that still does not account for the entire price.

The Wisconsin economists suggest that speculative traders, who increased their long positions, helped push up the prices of corn to levels seen today. Some farmers may not be surprised at that, but critics of rising food prices may be surprised.

Summary:
Rising corn prices in the past year have been attributed, in part, to the increasing demand for ethanol. Looking at the impact that all uses of corn have on its price, ethanol can take credit (or blame) for about 41¢ per bushel, raising the price to nearly $3.00 per bushel. However, other factors, including a strong export demand has added only 10¢ to the price, leaving the increased price of corn to the credit of speculators who take long positions in the market and push up prices as they buy futures contracts.