As gasoline prices rise, ethanol becomes increasingly attractive as an alternative. When food prices also increase, however, ethanol is villainized as starving the poor in less developed countries. But how much is ethanol to blame? Ethanol, obviously, increases the demand for corn, which can lead to higher corn prices. Seeing higher prices, farmers typically respond by growing more corn. Since the size of this supply response mitigates the extent to which corn prices continue to rise, it’s important to know how ethanol-driven demand affects corn production. That is the genesis of my work with Stacy Sneeringer.
The graph above illustrates the geographic correlation between ethanol and corn production. Since 1996, corn production clearly has expanded northwest through Minnesota and into the Dakotas. So has ethanol production. If you look carefully, though, you will see that ethanol facilities sprout up where corn is already bountiful. In other words, corn production clearly has an effect on ethanol production. Disentangling which causes which is a ‘chicken-or-the-egg‘ problem that Stacy and I address in our forthcoming working paper. (Watch this space for more details!)
I would be remiss if I didn’t mention my good friends Michael Roberts‘ and Wolfram Schlenkers‘ excellent work on this topic. Their innovative paper pushes forward the frontiers of empirical research in agricultural economics. It’s worth a read.