The economist Kash Mansori ruminates on how a market for ethanol may affect corn prices:
As the Wall Street Journal article cited above outlines, the profitability of ethanol production depends crucially on the price of corn (as well as on the price of oil, of course). That means that whenever the price of corn is low, there will be a substantial incentive to turn it into ethanol, increasing the demand for that cheap corn and boosting its price. Hence, the ability to turn corn into ethanol has effectively guaranteed corn farmers a minimum price for their product, something that farmers of almost all crops wish for (or actively lobby for); a price floor is one of the fondest, happiest dreams of most people in the farm business.
Something seems wrong with that picture though. If the demand for ethanol increases without significant increase in corn supply, won’t ethanol producers find sugar or other ethanol sources attractive no matter what corn subsidies are currently active?
I guess I’m missing something.
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