Will a drought affect the price of ethanol?

A lonely corn sprout makes its debut in Illinois. Corn harvests have exploded to meet increased demand for ethanol.
Scott Olson/Getty Images

In his 1798 Essay on the Principle of Population, English political economist Thomas Robert Malthus concluded that we humans are doomed to endure cycles of innovation, growth and massive famine as we outstrip our available resources. Subsequent economists earned their stripes discrediting his methodology, but numerous localized famines around the world have unfolded, more-or-less validating the patterns Malthus described. Over time, the term "Malthusian Economics" has come to describe any gloomy scenario in which a population exceeds the means to feed them.

Fast forward to modern times. The world finds itself once again in a bit of a Malthusian dilemma, but with a twist: Strong political tensions have arisen as weather extremes of drought and flooding have threatened the harvest of corn -- a critical food staple around the world. With oil prices at spiking and falling almost at will, economic pressure to make ethanol -- a corn-derived alternative fuel for cars and trucks -- has reached record highs.


Anyone who commutes to work or pays attention to the news knows that transportation has become the lifeblood of the modern economy. As a result, demand continues to grow for fuels that can replace or at least supplement the oil used to make gasoline.


­Corn, meanwhile, remains one of the most effective and sought-after components in the production of ethanol. Corn is an indispensable raw ingredient for producing numerous foodstuffs that nourish both livestock and people. Of course, this begs the question: What happens to ethanol when there's a lousy corn crop? What happens to hungry people when corn farmers make more money by selling their harvest for ethanol production than they would by selling it for food?

The economics and even the ethics of ethanol have been the subjects of spirited debate, and likely will be for some time. However, we can draw at least a few conclusions about the effects of ethanol in the global marketplace, based on a growing number of studies. This article examines the crucial role that "King Corn" plays as the world weighs its need to feed itself against its need to fuel the demand to replace oil.



Corn's Connection to Ethanol Prices

Ethanol production is already a multi-billion dollar industry with an economic ecosystem that includes farming, manufacturing, transportation and other sectors. Since so much money and so many jobs depend on this still-expanding industry, many people have studied the conditions that could benefit or harm the ethanol business.

One of the biggest concerns is what would happen if anything disrupted the supply of corn, a major feedstock for ethanol. Drought -- an unusually prolonged, extreme lack of rain -- poses one obvious threat.


In fact, a seminal study on the matter suggests a strong correlation between drought, low corn yields and higher ethanol prices. In that March 2008 study, Iowa State University researchers found that: 

  • Corn prices are "inextricably linked" to the U.S. ethanol industry, which depends on government subsidies and mandates to be competitive with other fuels.
  • A severe drought would boost corn prices so high that ethanol producers would have to idle their fuel production facilities.
  • Ethanol production probably would not meet federal requirements if a major drought took place.

[source: McPhail and Babcock]

Even as the government tries to encourage ethanol, farmers and corporations push back by lobbying Congress for special considerations. Here's a simplified look at some of that give and take: Alternative energy producers argue that they need price subsidies -- in other words, tax breaks -- on their output to compete in the marketplace with coal, oil and other entrenched fuels (all of which get their own taxpayer-funded subsidies). The government listened. The Energy Act of 2005 grants tax credits for an assortment of fuels, including a 51-cent per gallon tax credit for companies that make ethanol.

In addition, the Energy Independence and Security Act of 2007 (EISA) sought to stoke the farmers' demand for ethanol. Under EISA, the government requires fuel producers to introduce nine billion gallons of biofuel into the nation's fuel supply in 2008. What is biofuel? Biofuel is the catchall term for fuels that can be grown or renewed from biological sources, including ethanol, biodiesel and fuels refined from solid wastes.

­The EISA mandate ramps up expectations on fuel producers annually, culminating in a 36 billion gallon biofuels requirement in 2022­. The idea is to eventually make ethanol a significant portion of the U.S. transportation fuel supply. Policy makers say this will reduce the United States' dependency on foreign sources of oil.

Iowa State University researcher Bruce Babcock further told the U.S. Senate Committee on Agriculture, Nutrition and Forestry in August 2008:

­"Our decision to encourage expansion of biofuels production has changed the economics of agriculture by linking energy and feed markets. There seems little doubt that we will see biofuels production from corn and vegetable oil meet mandated levels" [source: Babcock].

Babcock's testimony, however, downplayed a contingency mentioned in the research paper he co-wrote earlier in the year. A severe drought, the paper said, would increase corn prices by 50 percent if fuel producers still had to meet the EISA biofuel mandate. That's because food manufacturers would be competing even more feverishly with fuel producers to buy corn.

Throughout most of recorded history, humankind has regarded droughts and other weather catastrophes as unavoidable "acts of God." But some scientists say we could be inviting severe and lengthy droughts upon ourselves. To find out why, go to the next page.


Fear of Drought

Corn growers, understandably, dread the prospect of a drought.

So, when government forecasters projected strong possibilities of a drought in 2008 because of prevailing "La Niña" weather patterns, the U.S. agricultural world went on high alert. That's because La Niña, a companion weather phenomenon to the better-known El Niño, is responsible for bringing periodic drought conditions to the southwestern United States.


­La Niña is believed to be responsible for the 1930s Dust Bowl -- stirringly chronicled by John Steinbeck in The Grapes of Wrath -- as well as severe droughts during the 1950s [source: Swaminathan].

Although we didn't experience such extreme weather in 2008, corn growers in the southwestern U.S. did have a scare early in the growing season, when June flooding submerged a good portion of low-lying fields there. However, near-perfect weather for the remainder of the summer contributed to what the USDA and farmers' groups say could be a near-record crop.

That sounds good, but here's the bad news: Scientists caution that Dust Bowl-like droughts could hit regularly this century as a result of human-induced climate change. According to models developed by scientists at Columbia University's Lamont-Doherty Earth Observatory, permanent drought could settle over Mexico and a large swath of the southwestern United States sometime around 2020. Two of the dozen or so major corn producing states, Kansas and Nebraska, fall under the atmospheric swath the scientists said is in danger of permanent drought [source: Seager, et al. ]. The Corn Belt, an area that includes major producers Iowa, Illinois, Nebraska, Minnesota, Indiana, Wisconsin, South Dakota, Michigan, Missouri, Kansas, Ohio and Kentucky, is no stranger to periodic devastating droughts. Arid weather in 1988 and 2006 left farmers in this region reeling and making comparisons to the 1930s Dust Bowl. But overall, farmers have come to rely on adequate rainfall to produce an overabundance of corn.

Prior to the increased demand created by ethanol a few years ago, U.S. corn growers typically raised enough corn to meet the year's demand, plus a substantial reserve that could be used in an emergency. One source of mild grumbling within the corn-growing community is that the reserve supply has been shrinking each year as the result of added demand from ethanol producers. Over the past couple of decades, nearly 16 percent of the total corn crop was held in reserve. In 2008, if Agriculture Department projections hold true, the reserve will be closer to 6 percent [source: Kub].

We know that corn plays a vital role in our nation's economy. When there's a problem with the corn crop, the effects of that problem are felt far and wide. For more on the many markets that rely on corn, go to the next page.



The Effort to Encourage Ethanol

An oil well stands in the middle of an Illinois corn field. The state is now one of the country's leading ethanol producers.
Scott Olson/Getty Images


­Ethanol production will grow in coming years for many reasons. Why? Because the law demands it.


The Energy Independence and Security Act of 2007 (EISA) sets mandates for making and using ethanol. The act also includes targets for solar, wind and coal energy production. Its goal is to reduce the amount of energy resources that the United States must import to meet its needs.

However, the attention to ethanol has also raised the ire of environmentalists and some leaders of international organizations who say ethanol production demand for corn is contributing to global hunger. New York Times columnist Paul Krugman has literally demonized ethanol, taking aim in a column that blamed ethanol production for food riots taking place around the world.

"Where the effects of bad policy are clearest, however, is in the rise of demon ethanol and other biofuels," Krugman wrote. He added, "Land used to grow biofuel feedstock is land not available to grow food, so subsidies to biofuel are a major factor in the food crisis. You might put it this way: People are starving in Africa so that American politicians can court votes in farm states" [source: Krugman].

More leading economists have come out against increased ethanol production. Economist Jeffrey D. Sachs railed against "the misguided policy in the U.S. and Europe of subsidizing the diversion of food crops to produce biofuels like corn-based ethanol" [source: Sachs]. Jean Ziegler, the U.N. Special Rapporteur for the Right to Food, went so far as to label biofuel production "a crime against humanity," for its role in raising global food prices [source: Cendrowicz].

Supporters of ethanol say such talk ignores the complex variables that determine food prices, of which cost of the actual grain (corn is a grain) is but a small portion. The National Corn Growers Association (NCGA) contends that there is plenty of food to feed the world. The problem is getting the food to where it's needed despite inadequate infrastructure or political unrest in nations where people are hungriest [source: National Corn Growers Association].

Corn happens to be the crop of choice in the United States when it comes to making ethanol, but it's not the only source that fuel producers can use. In fact, many agricultural products regarded as waste can be used for ethanol stock. Find out what they are on the next page.


Food or Fuel

An Iowa farmer shows off his corn seeds as increases in ethanol demand lead farmers to grow corn for ethanol production.
Mark Hirsch/­Getty Images


We're still a long way from making cars that can use household garbage for fuel. However, there may be waste products that allow for ethanol production without compromising corn use in food someday.


Scientists at the leading edge of ethanol research are investigating ways to make the fuel from biomass, organic by-products that might normally be considered useless.

This so-called cellulosic ethanol can be made from wheat and rice straw, switchgrass, paper pulp, and agricultural waste products such as corn cobs, citrus, algae and corn stover. (Stover is the name for leaves and stalks left over after corn is harvested.)

Environmentalists knock ethanol because they say it puts a misplaced emphasis on growing corn for fuel rather than food. They also say it does little to curb harmful atmospheric emissions, since fossil fuels must be burned to process ethanol.

But cellulosic ethanol, if fully developed, could alleviate those concerns. Proponents of cellulosic ethanol say it holds twice the energy potential of corn-based or sugar-based ethanol. That means less land would have to be devoted to harvesting crops for fuel. Furthermore, making and using cellulosic ethanol creates far fewer greenhouse gas emissions than corn-based ethanol. Whereas standard ethanol reduces harmful emissions by 20 to 30 percent compared to gasoline, cellulose-based ethanol cuts emissions by 80 percent [source: Energy Information Administration]. By 2008, a handful of companies, including Western Biomass Energy L.L.C. and Iogen Corp., had set up facilities to produce cellulosic ethanol, with several more announcing plans to follow suit [source: Fehrenbacher].

For more insight on ethanol, have a look at the links on the next page.


Lots More Information

Related HowStuffWorks Articles

More Great Links

  • Babcock, Bruce. "Statement Before the United States Senate Committee on Agriculture, Nutrition and Forestry." Center for Agricultural and Rural Development; Iowa State University. August 18, 2008. (Accessed Sept. 29, 2008) http://www.card.iastate.edu/presentations/babcock.senateag.8-18-08.testimony2.pdf
  • Cendrowicz, Leo. "Europe Grapples Over Biofuels." TIME. Thursday, May 8, 2008. (Accessed Sept. 25, 2008) http://www.time.com/time/business/article/0,8599,1738434,00.html?loomia_si=t0:a3:g2:r1:c0.18673
  • Ethanol Promotion and Information Council. "Cellulosic Ethanol is Here Today and Coming to a Pump Near You." (Accessed Sept. 23, 2008) http://www.drivingethanol.org/about_us/team_epic.aspx
  • Fehrenbacher, Katie. "11 Companies Racing to Build U.S. Cellulosic Ethanol Plants." Earth2tech. June 3rd, 2008. (Accessed Sept. 22, 2008)http://earth2tech.com/2008/06/03/12-companies-racing-to-build-cellulosic-ethanol-plants-in-the-us/
  • Gerstein, Josh. "Food Crisis Eclipsing Climate Change." The New York Sun. April 25, 2008. (Accessed Sept. 23, 2008)http://www.nysun.com/news/food-crisis-eclipsing-climate-change
  • Grunwald, Michael. "The Clean Energy Scam." TIME. Thursday, March 27, 2008. (Accessed Sept. 20, 2008)http://www.time.com/time/magazine/article/0,9171,1725975,00.html
  • Krugman, Paul. "Grains Gone Wild." The New York Times. April 7, 2008. (Accessed Sept. 21, 2008)http://www.nytimes.com/2008/04/07/opinion/07krugman.html?_r=1&oref=slogin
  • Kub, Elaine. "Analyzing the Complex 2008 Corn Crop." Ethanol Producer Magazine. October, 2008. (Accessed Oct. 1, 2008)http://www.ethanolproducer.com/article.jsp?article_id=4765
  • Malthus, Thomas Robert. "An Essay on the Principle of Population." J. Johnson. London. 1798
  • McPhail, Lihong Lu and Babcock, Bruce A. "Ethanol, Mandates, and Drought: Insights from a Stochastic Equilibrium Model of the U.S. Corn Market." Center for Agricultural and Rural Development, Iowa State University. Working Paper 08-WP 464. March 2008. (Accessed Sept. 25, 2008)http://www.card.iastate.edu/publications/DBS/PDFFiles/08wp464.pdf
  • National Agricultural Statistics Service. United States Department of Agriculture. "Corn, Field; National Statistics.". (Accessed Sept. 28, 2008) http://www.nass.usda.gov/QuickStats/index2.jsp
  • National Agricultural Statistics Service, United States Department of Agriculture. "Crop Production." Sept. 12, 2008. (Accessed Oct. 1, 2008). http://usda.mannlib.cornell.edu/usda/current/CropProd/CropProd-09-12-2008.pdf
  • National Corn Growers Association. "Frequently Asked Questions." (Accessed Sept. 29, 2007) http://www.ncga.com/education/main/FAQ.html
  • Peer, Melinda. "Corn Chomps Into Ethanol Producers' Margins." Forbes.com. June 18, 2008. (Accessed Sept. 20, 2008)http://www.forbes.com/2008/06/18/ethanol-producers-closer-markets-equity-cx_mp_0618markets48.html
  • Sachs, Jeffrey D. "How to End the Global Food Shortage. TIME. Thursday, April 24, 2008. (Accessed Sept. 24, 2008)http://www.time.com/time/magazine/article/0,9171,1734834,00.html
  • Seager, Richard, et al. "An Imminent Transition to a More Arid Climate in Southwestern North America." Lamont-Doherty Observatory of University of Columbia. March 2007. (Accessed Sept. 28, 2008)http://www.ldeo.columbia.edu/res/div/ocp/drought/science.shtml
  • Swaminathan, Nikhil. "Dust Bowl 2.0: Is the Southwest Drying Up?" Scientific American. April 5, 2007. (Accessed Sept. 28, 2008)http://www.sciam.com/article.cfm?id=southwest-america-drying-climate
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