Ethanol Trade and Prices: What Would They Look Like in a Free Market?

Amani Elobeid;
Simla Tokgoz;
Sandy Clarke;

September 26, 2006

Consumer prices of commodities that are traded in international markets are influenced by such factors as supply, demand and governmental policies to control trade or prices. Fuel ethanol is no exception. Intense debate has focused on the shifting costs of ethanol at the fuel pump and the impact of the United States' energy and trade policies.

A recent analysis by Amani Elobeid and Simla Tokgoz , associate scientists at Iowa State University's Center for Agricultural and Rural Development, addresses the question, What would happen to fuel ethanol prices and trade in a U.S. market free of trade distortions and taxes?

The study looks at the two largest ethanol producers: Brazil (ethanol from sugarcane) and the U.S.(ethanol primarily from corn). The analysis was based on mathematical simulations using an international ethanol model and country-specific models. The simulations were performed for two U.S. policy reform scenarios: one for trade liberalization alone and the other adding removal of the U.S. 51cent-per-gallon tax credit to refiners blending ethanol.

"Our study suggests that U.S. trade barriers have kept domestic prices strong," Elobeid said. "Removing trade distortions would decrease the price for U.S. ethanol, while the world price would increase, as U.S. demand – and ethanol imports – would increase."

According to the economists' analysis, Brazil would likely capitalize on this demand, especially in the U.S. coastal regions where transportation costs are high for Midwestern ethanol. Removal of the federal tax credit translates into only a small price reduction for consumers, because most U.S. ethanol is blended with gasoline at 10 percent.

"The effects of the removal of U.S. trade and price distortions extend well beyond the ethanol market to corn and its by-products and sugar markets," Tokgoz said.

The full report, "Removal of U.S. Ethanol Domestic and Trade Distortions: Impact on U.S. and Brazilian Ethanol Markets," is available online on the CARD Web site.