An Economic Analysis of Corn-based Ethanol Production

A global multi-commodity simulation model was developed to estimate the impact of changes in ethanol production on the U.S. corn industry. Increased ethanol production under the Energy Acts of 2005 and 2007 resulted in a significant increase in the price of corn. However, for corn-based ethanol production, the break-even price of corn is approximately $4.52 per bushel with a federal subsidy of $0.51 per gallon of pure ethanol and $2.50 gasoline. With a corn price of $4.52, the economically desirable ethanol production is approximately 11 billion gallons. In order to produce 15 billion gallons of corn-based ethanol and to maintain the price of corn at $4.52 per bushel, supply of corn in the U.S. should be increased substantially through increases in corn yield rather than increases in corn acres. The increased price of corn leads to major structural changes in the corn industry in the United States as well as other corn producing and consuming countries. Corn production would increase in response to higher price levels, corn used for livestock feed may decrease, and U.S. exports decrease due mainly to a surge in corn used for ethanol production. This decrease in U.S. exports should be met by additional production in other countries. The increased price of corn also leads to increases in the prices of soybeans, wheat, high fructose corn syrup (HFCS), and agricultural inputs, such as land value and cash rent, fertilizer and chemicals, and farm equipment. In addition, the current price of corn has resulted in an increase in the production cost of livestock. The increase in prices of agricultural commodities and inputs would cause increases in retail prices of food in the U.S