Ethanol Mandate Affects Corn Price
Not quite four years after Congress passed the Energy Independence and Security Act in 2007, markets are struggling to meet both the law's renewable fuels standard and grain demands from the livestock, food and export sectors, said Wally Tyner, an energy policy specialist at the West LaFayette, Ind.-based university. About 27 percent of the nation's corn crop must be devoted to ethanol this year to meet the federal mandate, leaving other corn users to compete for the remaining 73 percent.
"The renewable fuels standard requires 15 billion gallons of ethanol be consumed per year by 2015, regardless of what the price of corn is and regardless of what the price of crude oil is," Tyner says. "Corn could be $2 a bushel or $10 a bushel, crude could be $50 a barrel or $100 a barrel and that 15 billion gallons has to be there. That means ethanol production is totally unresponsive to price. There's no flexibility."
This "inelasticity" has led to market volatility and wild swings in corn prices, Tyner notes, which have topped $7 a bushel in recent months. When markets are more inelastic, supply disruptions often push prices higher than they might be in a typical supply/demand system, he said.