Katarina Tanner

March 12, 2008

# of Words: 470

Ethanol Production

            Existing federal laws that mandate ethanol in United States gasoline production have diverted trainloads of corn from America’s food supply-chain to ethanol factories.  A major new study formally issued May 17 “conservatively estimates that increased corn prices driven by rapidly expanding United States ethanol production have increased United States retail food prices by fourteen billion annually.” 

The study finds that increases in retail food prices could reach twenty billion annually when crude oil prices array from $65 to $70 per barrel and corn prices reach $4.42 per bushel, weighed against the $2 per bushel that existed in 2006.  Under this scenario the study shows that, consuming more than half of United States corn, wheat and other grain production, United States ethanol production could reach thirty billion gallons by 2016.  So, United States planted corn acreage would increase by 44 percent, from 78 million acres in 2006 to 112.5 million acres.  This is a classic example of the law of supply.  As the law of supply states, holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied.  In this case, the price of corn has increased causing a substantial increase in the quantity of corn supplied.

While the costs of corn are increasing, the production costs of corn products as well as meat and dairy products are increasing.  As fuel companies buy more and more corn, prices will rise for cereals, corn bread, popcorn, corn syrup, corn tortillas, cooking oils, and many other goods that use corn as an input in the production process.  The change in the price of inputs is the factor that is most likely to cause the supply curve for a product to shift.  So, because the price of corn, which is a component of many goods, has increased, the production costs of these goods increases and these goods will be less profitable at every price.

Uncle Sam gives ethanol manufacturers a 51-cent-per-gallon subsidy, so therefore there is a 54-cent-per-gallon tariff implicated with ethanol imports.  This is one explanation for another unintended consequence that affects for the most part everyone’s pockets.  Gasoline prices shot up last summer since ethanol, largely produced in the Midwest, had to be shipped south and to both coasts to be blended, by law, with gasoline. 

The demand for ethanol has affected many goods in the market.  Its amazing how one element can impose an adjustment upon numerous other elements in the market?  Many goods have experienced, or soon will, a production cost increase as a result of increasing corn prices determined by the quickly expanding ethanol production in the United States.  However there could be more consequences to result from this, this study did not consider numerous impacts such as demands for higher wages, the impact on environmentally sensitive land, the availability of grain-based humanitarian food aid, and the availability and cost of healthier oils.