Mandated Corn Ethanol’s Ripple Effect on Global Commodity Prices and Food Security

NOTE that in April of 2012, Stanford University’s Center on Food Security and Environment presented a talk by Rosamond Naylor titled “Biofuels: the Changing Nature of Agricultural Demand”. This presentation was quite thorough in explaining how mandated biofuels policies are changing the economics and world demand of food commodities. Thank you to Dr. Naylor for allowing me to use slides from this presentation in this post in which I am highlighting some of the key points from the presentation and adding quite a few of my own. If you wish to watch the video presentation go here.

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“Mess up the corn market, and you pretty much mess up everything…” (anon.)

Mandating the use of biofuels changes the whole agricultural commodity structure. Mandates mean that the quantity of key agricultural commodities demanded is no longer responsive to price, a term referred to as inelastic demand. Such demand leads to larger price swings during supply shocks like the one we’ve just experienced with the drought that occurred this summer here in the U.S.


Source: Stanford Center on Food Security and the Environment. Rosamond Naylor.

As the above graph so well demonstrates, we have entered into an age where our agricultural commodity markets are changed by growing biofuels demand. The effects of mandates are many, and for farm producers and for agribusiness there is much to like about increased demand. Biofuels policies are increasing agricultural production around the world, adding to infrastructure in developing nations, increasing incomes and profits for producers, and creating, perhaps, a layer of added food supply chain security as a positive spillover effect — that is if you are only concerned about the globe’s capacity for producing food. The environmental consequences of converting industrial monoculture high input commodity crops into fuel are most entirely negative. There is a general apathy about this, however, since it occurs in “fly-over country”.

Mandates increase the prices of grains and oilseeds, and they also increase the price volatility of these commodities. Mandates reduce stocks, or supply. They create price expectations. Import demand may be created when feedstocks for mandated biofuels can’t be supplied domestically. Another large ripple effect is the increasing cost of farmland. Today’s expensive farmland will make it more difficult for the next generation of farmers to begin farming in this era of a globally aged farmer, which will likely contribute to the future success of large industrial farm operators.

Overall, the rural areas experience income growth because of biofuels mandates.


Source: Stanford Center on Food Security and the Environment. Rosamond Naylor.

“U.S. ethanol policy may be the single most significant contributor to world food price instability.”

Today’s low natural gas price is helping the ethanol industry. By using natural gas as the energy source in distillation of the ethanol product, ethanol is able to meet our government’s clean fuel emissions requirement. And the cost of production is reduced through lower plant processing costs as well as through lower fertilizer costs used in growing the corn.


Source: Stanford Center on Food Security and the Environment. Rosamond Naylor.

When rapeseed gets used to produce biodiesel in the EU, the rapeseed price rises. The ripple effect is that China’s rapeseed imports fall and it then uses more soy oil and palm oil for cooking fuel.

This next graph demonstrates the give and take going on in land use for the production of specific agricultural commodities as the fallout from biofuels policies continues to adjust the demand for each commodity. This is still evolving.


Source: Stanford Center on Food Security and the Environment. Rosamond Naylor.

Today’s main stream media news about agriculture and food prices tends to discount or else not recognize the effect that the U.S. corn ethanol policy and global biofuels policies are having on the global agricultural commodity markets.

Naylor gave us the following scenario, to demonstrate the ripple effect of ethanol policy…. As U.S. farmers grow more corn and less soy, Brazil takes up a greater share of the soy market, which causes a land use change. As corn demand rises, prices rise and wheat becomes substituted for corn in livestock feeds. Thus, the wheat price rises. (We are seeing this right now.) As wheat prices rise, consumers throughout the world shift from bread to rice, causing rice prices to rise.

“With serious disruption in oil markets, demand for biofuels could expand almost indefinitely….”

The mandated use of corn for ethanol in the United States is set to plateau in the year 2015. Currently 40 percent of the corn crop in the U.S. goes towards ethanol production (more this year because of the drought). Last year, for the first time ever, more corn was used to produce ethanol than was used to feed livestock in this nation. We are increasing the amount of corn demanded for ethanol production until it reaches a level of 15 billion gallons in the year 2015 according to our revised 2010 Renewable Fuels Standard policy. The industry also desires an expansion of both ethanol and distillers grains in export markets.

While the policy of ethanol seems firmly in place today, the current economics of corn ethanol production is ailing. Some ethanol plants have been idled in recent months due to high corn costs which make the product unprofitable. To make corn ethanol production profitable, the industry desires low corn prices and high gasoline prices. A bonus is that today’s low natural gas prices help profit margins.

Some analysts are suggesting that oil prices may be lower over the next year or two. Today’s corn prices following our Midwestern drought are high. The coming two years may be very interesting in seeing how this plays out both economically and politically for the ethanol industry.

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