Speculate This: Ethanol’s Impact on Corn Prices

A recent study concludes that “commodities speculation,” and not ethanol production, was the principal cause of higher corn prices last summer. OxFam, which has argued that biofuels have "dragged 30 million people into poverty," and many other critics have blamed ethanol production for record-high corn prices.

The price of corn has dropped about 50% since its peak. As such, some ethanol proponents have argued it “can’t” be ethanol that was the problem, because ethanol production remains relatively high, and corn prices went down. However, the spot price for oil is also down to around $63 per barrel, which is about half the $130 per barrel prices early this year. Since oil-based products are essential to corn production, the price of corn should be coming down along with this key input.

When prices were high, any argument that ethanol was the sole reason for high corn prices would have been misguided. The Renewable Fuel Standard (RFS) and use of ethanol instead of MBTE as a gasoline additive certainly drove up demand for ethanol, and thus corn, impacting the corn prices. But higher oil prices and increased demand for food, also drove corn prices higher.

It is equally misguided to think that because corn prices came back down, corn prices were merely part of a “speculative bubble” and that increased ethanol demand has no bearing on corn prices. Oil prices came back down largely because reduced oil consumption .

Ethanol may not have been the direct or sole cause of higher prices, but increased ethanol mandates played a significant role in the price increases. And that is not likely to change any time soon.