The price of a commodity is usually based on supply and demand, but when government policies are involved other factors come into play. A new economic study by two Iowa State University researchers ask the question: What would happen to fuel ethanol prices and trade in a U.S. market free of trade distortions and taxes?
The analysis conducted by Amani Elobeid and Simla Tokgoz, associate scientists at Iowa State University's Center for Agricultural and Rural Development, addresses that question.
The study looked at two large ethanol producers - Brazil (ethanol from sugarcane) and the United States (ethanol 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 along and the other adding removal of the U.S. 51-cent-per-gallong tax credit to refiners blending ethanol.
U.S. trade barriers have kept domestic prices strong, according to the study. In a press release, Elobeid adds: "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, Brazil would probably capitalize on this free-market demand, especially in coastal areas where transportation costs can be high for ethanol shipped in from the Midwest. Removal of the tax credit would translate into only a small price reduction for consumers, the study shows.
The full report, "Removal of U.S. Ethanol Domestic and Trade Distortions: Impact on U.S. and Brazilian Ethanol Markets" can be viewed at www.card.iastate.edu.