April 13, 2006

NDSU Studies Ethanol’s Impact on the Corn Industry

Future ethanol production increases will raise corn prices worldwide, according to Won Koo, a professor of agricultural economics at North Dakota State University and director of the Center for Agricultural Policy and Trade Studies.

“The Energy Security Act of 2005 mandates that ethanol consumption increase to 7 billion gallons by 2012,” Koo says. “This mandate and the federal government’s 51-cent- per-gallon subsidy on ethanol production will rapidly increase demand for corn used in the production of ethanol.”

Using the 7 billion gallon scenario, corn prices in 2014 will be $2.46 per bushel. If 14 billion gallons of ethanol are produced, the price of corn should increase to $3 per bushel. These prices are 6 percent and 29 percent higher then the price of corn under the base scenario, which keeps ethanol production at current levels (approximately 3.6 billion gallons).

“We looked at other scenarios, which account for high and low energy prices and the loss of the ethanol subsidy, but they did not affect the price of corn substantially,” Koo says.

Increasing the use of corn for ethanol production also would have an effect of competing crops. These include soybeans in the Corn Belt and wheat in the central and northern Plains.

“If 7 billion gallons of ethanol are produced, wheat growers would receive $26.1 million more in gross returns and soybean growers would receive $179.7 million more,” Koo says. “If 14 billion gallons of ethanol are produced, wheat producers would receive $183.2 million more and soybean producers would receive $1.79 billion more.”

Other study findings:

• Corn exports would decrease 3 percent under the 7 billion gallon scenario and 13 percent under the 14 billion gallon scenario.
• Corn used as feed would decrease 8 percent if 7 billion more gallons of ethanol were produced and 39 percent if 14 billion more gallons were produced. However, substantial quantities of corn byproducts would be available to replace corn in livestock rations.
• When corn used for ethanol production increases, government payments to producers decreases because payment are based on current prices. Under the 7 billion and 14 billion gallon scenario, corn prices would be above the target price, so the government would not make counter-cyclical payments, reducing government spending.

North Dakota producers planted more than 1.4 million acres of corn in 2005.

The complete report, “Ethanol’s Impact on the U.S. Corn Industry,” by Koo, Richard Taylor, Jeremy Mattson and Jose Andino, is available at
http://www.ext.nodak.edu/~aedept/aemisc/pubtotallist1.htm.

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Source: Won Koo, (701) 231-7448, won.koo@ndsu.edu
Editor: Rich Mattern, (701) 231-6136, richard.mattern@ndsu.edu

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