Reduced Gasoline Demand could Lower Ethanol Demand, Farm Income in the Future
Amani Elobeid, 515-294-8122; firstname.lastname@example.org
Jerome Dumortier, Indiana University-Purdue University Indianapolis, 317-274-1817; email@example.com
Miguel Carriquiry, Universidad de la República Oriental del Uruguay; firstname.lastname@example.org
Nathan Cook, Communications, 515-294-3809; email@example.com
November 12, 2020
Ames, IA – The United States is the world’s largest producer, consumer, and exporter of ethanol. In 2019, the United States produced about 16 billion gallons of ethanol, about 45% more than Brazil, the world’s second-largest producer.
Consumer demand for gasoline is the largest factor in the demand for ethanol in the United States. Ethanol is typically sold to consumers combined with gasoline in blends of 10%, 15%, and 85%, which means that if gasoline demand falls, ethanol demand will fall along with it. This linkage is due to the blend wall—the maximum amount of ethanol the United States needs to mix with gasoline for domestic consumption.
“The blend wall is determined by vehicle technology,” said Jerome Dumortier, associate professor of economics at Indiana University-Purdue University Indianapolis. Dumortier said that vehicles that are model year 2001 or newer are capable of using up to 15% ethanol, but many older vehicles can only use 10% ethanol because a higher ethanol content can damage the engine. “This means that you cannot simply increase the ethanol content in gasoline without changing the vehicle fleet,” he said.
Dumortier is a co-author of a new study “Where does all the biofuel go? Fuel efficiency gains and its effects on global agricultural production,” with Miguel Carriquiry, professor of economics at Universidad de la República (Uruguay), and Amani Elobeid, adjunct associate professor of economics at Iowa State University and the Center for Agricultural and Rural Development. Their study examines a 30% drop in U.S. ethanol demand that the U.S. Energy Information Administration projects will occur by 2050 and how that reduction in demand will affect U.S. and global agricultural production. The U.S. EIA says the projected decline in U.S. gasoline consumption is mostly due to increased fuel efficiency and, to a lesser extent, a larger number of electric vehicles in the U.S. fleet.
Dumortier said that the United States would need policy changes if it wanted to counteract a potential large reduction in ethanol demand in the future. “The policy change right now would not be small—it would need to promote flex-fuel vehicles and the establishment of a nationwide network of gas stations that supply E85, which is common in the Midwest but not elsewhere,” he said.
If U.S. demand for gasoline falls by 30%, and ethanol demand falls accordingly, what will happen to all the biofuels the United States produces? “The ethanol produced will likely not be consumed in the United States, given the current projections,” Dumortier said. “There is a chance for exports, but the question is if other countries are counting on electric vehicles taking off,” he said.
Currently, almost 40% of the corn grown in the United State is used to produce biofuels, so a large change in ethanol consumption will have a noticeable impact on agricultural markets, which is what the study examines. The most notable changes found are a projected 3% drop in global corn planted area and a 6.3% drop in U.S. corn prices, the latter of which could lead to a reduction in farm income.
“We see that there is an almost 10% reduction in profits for corn farmers,” Dumortier said. He hypothesized that would lead to two different issues. “First, farmers who remain in agriculture will see lower profits,” he said. “Second, some farmers not in the Corn Belt will find it unprofitable to continue production and leave farming altogether.”
However, the study also finds benefits for consumers. “The price of corn affects costs of production of a variety of food products,” said Carriquiry. “Lower corn prices will lower feed costs and thus result in reducing the cost of production of meats, dairy products, and eggs. Lower corn prices will also put downward pressure on the prices of products directly based on corn and on other grains and oilseeds,” he said. “All things equal, lower energy prices are expected to further reduce costs of production and crop prices.”
For over 60 years, the Center for Agricultural and Rural Development at Iowa State University has conducted innovative public policy and economic research on local, regional, and global agricultural issues, combining academic excellence with engagement and anticipatory thinking to inform and benefit society.