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Tuesday, January 30, 2007

Extra!! Extra!! Corn Growers Support Bush

At least according to this Southeast Farm Press article:
The National Corn Growers Association characterized President George W. Bush's call for increased production of biofuels as a bold and vital step toward U.S. energy security and one that that will strengthen agriculture.
Go figure.

But here's where things get a little bit fuzzy:
NCGA believes its 15 x 15 x 15 vision - 15 billion bushels of corn used to produce 15 billion gallons of ethanol by 2015 - will serve as a solid foundation and ideal model for a larger biofuels sector that utilizes a wide variety of feedstocks.
The entire corn crop in the U.S. is a little more than 10-11 billion bushels. However, the additional 15 billion bushels will require corn grown on marginal land. (Update 2/5/2007: Having read a bit more, the 15x15x15 initiative suggests an additional 4-5 billion bushels of corn, not 15 billion additional bushels. Nevertheless, beyond certain yield technologies that might increase the output of corn per acre, the argument that lower quality land will be used in corn production or switched from the production other products still pertains)

This implies a greater cost to grow the additional corn which, in turn, will push up the cost of ethanol (and other corn products - at least according to Ricardian theory of land rent).

There is likely no free lunch here - we use petroleum based fuel because it is the cheapest to produce, although perhaps not the cheapest to consume after accounting for pollution. On the other hand, ethanol might be end up being more expensive to produce but cheaper to consume, if it provides fewer negative externalities. However, how will consumers respond if an ethanol-based fuel system leads to higher prices at the pump because less productive inputs are implemented in the production of corn?

The current opinion in the ag sector seems to suggest that there will be an increase in the price of a large number of agriculture commodities, much of this driven by the increased price of corn which is being driven, in part, by the ethanol mandate. This is good news for (certain) farmers.

However, if price increases hit the consumer's pocketbook in a meaningful way, what then? I wonder how many people will accept higher prices (for any number of different products) in return for a "cleaner environment." It would be nice of this clean environment were also supported by the actions of non-U.S. citizens, governments, and firms, but to-date that seems unlikely to be the case. Therefore, the benefits of the clean-fuel movement will not fully internalized contemporaneously.

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