Wonk Blog: Study: U.S. Could Put a Big Dent in Food Prices by Relaxing Ethanol Rules

August 21, 2012

The worst U.S. drought in half a century has hampered the country’s corn production and caused plenty of worry about the rising cost of food worldwide. But the spike also raises a policy question. Should the United States now suspend its rules that divert a hefty portion of the U.S. corn crop—40 percent, by some counts—into ethanol fuel for cars and trucks?

One top U.N. food official, José Graziano da Silva, has already called for an “immediate, temporary suspension” of the U.S. ethanol mandate in order to ease the pressure on world food prices. But how much would this actually help? Here’s one possible answer. A new paper (pdf) out from three agricultural economists at Purdue University finds that even a partial relaxation of the mandate could reduce corn prices by up to 20 percent next year. (It’s probably too late to seriously affect prices this year.) But, as always, there are complications involved that make these estimates uncertain.

Currently, the EPA’s Renewable Fuel Standard requires refiners to blend a certain amount of ethanol in with their gasoline. In 2013, this will require about 13.8 billion gallons of ethanol. Since corn ethanol is the most viable form of ethanol in the United States at the moment, this creates a hefty—and fairly inflexible—market for corn. And that causes corn prices to rise higher than they otherwise would.