USDA chief economist office examines ethanol’s complex impact

By Susanne Retka Schill | October 29, 2015

USDA's Office of the Chief Economist just released a comprehensive report on ethanol. The 87-page report, “U.S. Ethanol: An Examination of Policy, Production, Use, Distribution, and Market Interactions,” examines the complex interaction of ethanol production with agricultural markets and government policies.

In the forward, USDA Chief Economist Robert Johansson, explains the report “intends to bring clarity to the complex interaction of ethanol production with agricultural markets and government policies.  While there are many other ethanol studies available, this report is unique in that it centers on the pivotal role that ethanol plays in the crop and feed markets.”

Following a comprehensive overview of policy development and ethanol industry growth, the second chapter, the lengthiest of the report, covers the interaction between ethanol, crop and livestock markets. Those familiar with the USDA’s World Agriculture Supply and Demand Estimates reports will recognize the data sets pulled into this report. The 30-page section attempts to discuss every arena where the growth in ethanol had an impact, balanced with a discussion on the many other factors in play at the time. Multiple tables and graphs showing trends from 2000 to the present illustrate the many interacting elements of the ag sector: corn acres, yields, production and utilization in multiple sectors, along with exports and world production.

An examination of the changes in crops and forages discusses not only ethanol’s influence, but the influence from other factors and changes from the continued concentration in the livestock and poultry industries and other factors. For example, an index of grain-consuming animals units that reached a peaked in 2007-’08, has declined since. “Much of this decline can be explained by higher feed costs, reflecting not just higher grain prices but also drought stress in many areas, along with changes in meat and poultry product markets,” the report says. The greater concentration in the livestock and poultry industries, the report says, “made corn’s economies of scale even more important, ‘crowding out’ smaller alternative grains.” The report notes that even when corn prices increased, “there was not resurgence in the production of other grains because the relative net returns for growing corn outpaced the alternative grains.”     

The discussion on corn prices gives a comprehensive historical review of market factors in both corn and distillers grains and in the economy as a whole. Talking about the upward price trend for corn that developed in the 2006-’07, with ethanol the significant factor in that first year, the report adds: “While ethanol remained the major driver of growth in demand for corn in the following years, many other factors began to add to price pressure and complicate the situation. Strong international demand for grains and oilseeds, a widespread commodity boom, and huge inflows of speculative and investor money all helped push corn and other agricultural prices higher. A growing link between energy prices and corn as the ethanol component of the fuel supply increased also exposed corn to more price volatility. Historically, there had been little correlation between corn and oil prices.” 

Other chapters provide detailed analyses on ethanol production costs, profitability, processing technology and infrastructure. Also examined are the economics of blending ethanol into gasoline and federal and state policies related to ethanol. The chapters provide a historical review of the development of the ethanol and supporting industries, such as grain storage, and the evolution of distribution and transportation systems.

The report lists three editors and multiple authors of the eight chapters. USDA analysts from the offices of energy policy and new uses, the Farm Service Agency and Agricultural Marketing Service wrote the sections on crop and feed dynamics, while authors from the Energy Information Agency and Iowa State University contributed to the sections examining ethanol blending and plant profitability.  The editors include James Duffield, USDA office of energy policy and new uses, Robert Johansson, USDA chief economist, Seth Meyer, USDA World Agricultural Outlook Board.

You can find the complete report, “U.S. Ethanol: An Examination of Policy, Production, Use, Distribution, and Market Interactions” on the USDA website.