Federal law that helped jump-start the ethanol industry in the United States also is shifting normal supply-and-demand forces within commodities markets, said a Purdue University agricultural economist.
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.
Ethanol Mandate Affects Corn Price
July 5, 2011