>Corn Ethanol and Economics

>Mark sent in a question about corn ethanol, and I think the best way to respond is with a link to zfacts.com, which I think does the best job of analyzing the data out there to look into the possibilities. They make sure to use the most favorable pro-ethanol assumptions (they also show their work). It’s a cop-out, but they do a much better job than I could, so here you go.

Here’s the summary:

There’s $1.45 of subsidy in every gallon of ethanol. Since ethanol only contains 2/3 of the energy of gasoline, this is equivalent to about $2.20 per gallon of gasoline. These subsidies consist of a blender’s credit (which goes to fuel companies that include ethanol in motor vehicle fuel) as well as production subsidies for corn (which goes to farms that produce field corn that is sold to ethanol producers). There is also the artificial price support of the federal ethanol production requirements, which require blenders to use more than the market equilibrium amount of ethanol in fuel.

Ethanol has the strange tendency to sell for the same price or higher per gallon as gasoline, even though it has less energy per gallon. This means that if you fill your tank with E85, you will get poorer fuel economy and have to visit the gas station more often, costing you more.

So we’re paying billions in subsidies for fuel that ends up costing the same and burns up faster, while using up valuable farmland as well as the fuels needed to process the corn into ethanol? Smart.

Who gets rich off of this? Owners of corn-producing land for one. Land that can produce a crop that is highly subsidized is worth more after the subsidy than before. Therefore, the owner can charge more for rent if the farmland is leased, and the imputed rent* from a farmer-owner is greater. Because the processing of corn into ethanol has relatively low barriers to entry, the returns to processing should not be higher than normal economic profits. Likewise, since anyone can go to school, learn to farm, purchase equipment, rent land, and farm some corn, the actual farmer should not accrue any unusual profits either**.

*Just look it up, I’m not going to go into imputed rent here
**I’m not saying farming is easy or that “any dummy could do it”, I’m saying that there are no particular barriers to entry like patents, regulations or market forces that would prevent a reasonably motivated and capable firm from starting up. Something I learned from “The Undercover Economist” is that scarcity creates profits, and the scarcity when it comes to producing ethanol is productive farmland.

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About perkinsms

I'm an engineer and father interested in transit, parking and economics.
This entry was posted in cars, economics, efficiency, ethanol, gas, government, tax. Bookmark the permalink.

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