Renewable Fuel Prices Driven by Federal Policies, Oil Prices MU Agriculture Policy Analysts say

April 13, 2009

Story Contact:  Christian Basi, 573-882-4430, BasiC@missouri.edu

"Going green," driving hybrid cars and looking for alternative energy sources have been part of a national conversation in the past several years. As oil prices climbed to their 2008 peaks, ethanol production also multiplied exponentially. Many claimed that the demand for, and production of, ethanol had a direct effect on feed prices for hogs and cattle, but others said ethanol consumption had almost no effect on other users. University of Missouri analysts say that the effect was neither catastrophic nor negligible, and that today's ethanol prices are based on government policies and oil prices.

"We're still producing a lot more ethanol than we were one year ago," said Pat Westhoff, co-director of the MU Food and Agricultural Policy Research Institute at the University of Missouri (FAPRI-MU). "However, we wouldn't be making this much ethanol if it were not for government policies, such as tax credits and mandates requiring a certain amount of ethanol at the pump."

Westhoff, along with several researchers at FAPRI-MU, constantly analyze and project the agricultural and biofuel market conditions based on more than 500 possible scenarios. Through their work, Westhoff found that food prices were affected by ethanol production, but that ethanol was not the primary factor for the 5.5 percent inflation in food prices in 2008.

When oil prices dropped rapidly at the end of 2008 and the beginning of 2009, several ethanol plants either slowed production or went bankrupt. Lower oil prices reduce the demand for ethanol, but current policies require that a certain amount of ethanol be used. Without these requirements, ethanol prices would be even lower than they are today, resulting in even less production of ethanol and lower prices of corn. If the mandates to use a certain amount of ethanol in gasoline did not exist, ethanol producers would be hurting badly now, while livestock producers are probably continuing to pay a bit more for their feed than they might if the policies were not in place, Westhoff said.

"Government ethanol mandates have an effect, but probably not as much as some people might think," Westhoff said. "The current food prices probably have a lot more to do with other factors that have nothing to do with ethanol."

At the same time, Westhoff and his team are trying to determine what effect ethanol has at the pump. While adding ethanol to gasoline does affect the price of fuel directly, it also might create a lower price for gasoline due to competition.

"One of our goals is to determine what kind of effect ethanol has at the pump," said Seth Meyer, research assistant professor at FAPRI-MU. "Does it cost us more, less or about the same to drive around town? We need to look at the industry and determine what would happen if ethanol were not competing to be in our gas tanks, and we also need to look at the costs of the mandates - and who pays those costs - to determine if there is an effect."

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NOTE: Westhoff, Meyer and Wyatt Thompson, assistant professor of agriculture economics and member of FAPRI, will make a presentation about the biofuels industry at the upcoming Energy Summit at the University of Missouri April 22 and 23. For more information on the Energy Summit, visit www.missourisummits.com