Ethanol mandate shutdown would drop corn prices no more than 14 percent, experts testify in Senate

May 8, 2008

In Washington, Iowa State University economist Bruce Babcock testified before a US Senate committee yesterday that if all ethanol subsidies were halted immediately, the price of a bushel of corn would drop 13%, but only have an effect on food prices of a few percentage points.

Meanwhile, a study from the International Food Policy Research Institute found that if ethanol production were capped at 2007 levels, corn prices would fall only 14 percent by 2015. The Chairman of the Council of Economic Advisors said that ethanol production was responsible for two to three percent of the increase in global food prices.

A change in Chinese meat consumption habits since 1995 is diverting eight billion bushels of grain per year to livestock feed and could empty global grain stocks by September 2010, according to a new study from Biofuels Digest, now available for download here in an expanded version.

The Study, â€œMeat vs Fuel: Grain use in the U.S. and China, 1995-2008â€ concluded that, even if the U.S. ethanol industry were shut down tomorrow, rising Chinese demand for meat, and the ensuing livestock feed demand, will empty global grain stocks as soon as 2013. The report offers gloomy news for policymakers who have hoped to address global food vs. fuel concerns by restraining U.S. ethanol demand.

â€œItâ€™s not food, itâ€™s not fuel, itâ€™s China,â€ said Jim Lane, editor of Biofuels Digest and author of the report.

In Washington, the chief economist at the Department of Agriculture said that ethanol subsidies have had an “important impact” on corn prices, saying that retail food prices increased by 4 percent in 2007 and will increase by 4 to 23.,5 percent in 2008. Joseph Glauber added that ethanol had little to do with increasing wheat and rice prices, attributing those rises to Chinese demand, and Australian and Canadian crop failures.

The US Labor Department reported that food prices rose at an annual 4.4. percent rate in March, but gasoline and other energy costs have rises 17 percent in the past year.

Researchers from Texas A&M University have concluded that eliminating the Renewable Fuel Standard “does not result in significantly lower corn prices,” and that “The underlying force driving changes in the agricultural industry, along with the economy as a whole, is overall higher energy costs, evidenced by $100 per barrel oil.”

The report said that, in addition, speculative investment in the commodities futures markets were leading to price volatility, and “the loss of the ability to use futures markets for price risk management due to the inability to finance margin requirements.” Commenting on the report, National Corn Growers Association president Ron Litterer said â€œThe Texas A&M study dispels the food vs. fuel debate. This study shows there are many forces creating increases in food costs and ethanol is not a major factor.â€