The Heritage Foundation: Renewable Fuel Standard, Ethanol Use, and Corn Prices

September 17, 2012

As corn prices hit record highs, the folly of the federal ethanol mandate becomes ever more apparent. The widespread drought in the Corn Belt has dimmed expectations of a record harvest as predicted earlier this year. The U.S. Department of Agriculture’s most recent projection for this year’s corn harvest warns that it will be the lowest since 2006–2007 and that the per-acre yield will be the worst since 1995–1996.

On top of the drought’s impact on corn prices is the impact of the federal Renewable Fuel Standard (RFS). The RFS sets a floor on the volume of ethanol that must be included in the U.S. gasoline supply. This floor ratchets up every year. Because cellulosic ethanol from non-food sources, such as switch grass and wood chips, has failed to develop as hoped, nearly all of the mandated ethanol is distilled from corn. Although the mandate’s effect on corn prices can be significant—perhaps as high as 68 percent—calculating the impact is not straightforward.