But it took two events to keep corn-based ethanol from sliding down the wall. Researchers found that the oil industry-preferred oxygenate MTBE, a potential carcinogen, was seeping into the water supply. That boosted ethanol’s use as an oxygenate in the large California market as the use of MTBE in motor fuel was banned.
The other event was a series of hurricanes in the Gulf of Mexico, including Katrina and Rita, that forced the shutdown of oil platforms and onshore refineries. As a result, the price of gasoline soared, making the existing ethanol plants extremely profitable.
And then an administration that had been skeptical of ethanol became its biggest booster. With the high level of profitability of ethanol plants and new government mandates, an unprecedented influx of Wall Street-type investment resulted in a sharp increase in the expected amount of corn that would be needed.
The increase in the demand for biofuels the report cites as one of the causes of the price spike of 2008 did not happen in a vacuum. One of the impacts of a long period of low prices was the increased investment by corn and soybean farmers in demand enhancement research. Without those low prices, especially prices well below the cost of production, the early investment by farmers in the ethanol industry and supportive public policy would have been much slower in development.
In our view the report missed one of the most important impacts of the 30-year regimen of declining real commodity prices; it triggered investment in non-food demand enhancement. Ethanol and other biofuels just happened to be what stuck to the wall.
Daryll E. Ray holds the Blasingame Chair of Excellence in Agricultural Policy, Institute of Agriculture, University of Tennessee, and is the Director of UT’s Agricultural Policy Analysis Center (APAC). Harwood D. Schaffer is a Research Assistant Professor at APAC. (865) 974-7407; Fax: (865) 974-7298; firstname.lastname@example.org and email@example.com; http://www.agpolicy.org.