The Effects of Ethanol on the Economy

The Effects of Ethanol on the Economy

ECON 203

May 3, 2007

The Effects of Ethanol on the Economy

Corn crops are responsible for producing numerous valuable resources and products and therefore, corn is a vital part of the nation's agricultural industry. One of the most valuable products derived from corn is ethanol. Due to the demand for ethanol corn has experienced an increase in value. Farmers are able to charge more for their crop resulting in an increase in price for many other products that rely heavily on these crops. The high demand for products produced from corn have caused many farmers to abandon their original crops and start farming corn in order to tap into the highly profitable corn market. This topic has sparked much debate over the efficiency of this source of energy.

The most popular use for Ethanol is as a fuel. It is a clean-burning fuel that is produced from renewable sources. This grain alcohol is formed from crops like corn. Since ethanol is domestically produced it reduces America's dependence on foreign countries for energy sources. There are many benefits of using ethanol as an energy source. It has had a positive effect on the local, state, and national economy. Small farm towns where the crops are grown and processed reap the benefits of having a locally produced energy source and vehicle drivers all over the country benefit from being able to purchase a locally created fuel. The job opportunities created from the construction of ethanol plants are endless. With additional jobs comes additional household income. Agriculture, farmers and rural communities have also experienced many advantages. The production of ethanol has led to the development of rural areas because of the demand for corn and other agricultural products used in the making. Since corn plays such a large role in the ethanol industry, corn farmers are able to make more of a profit from selling their crops. This is generating a very large increase in net farm income annually. Among many of the benefits is the independence Americans gain from being able to make a home grown renewable energy source. Ethanol has the ability to replace crude oil that we normally import from foreign countries. With the creation of ethanol our reliance on other countries for an energy source has greatly diminished. The United States can currently produce five billion gallons of ethanol per year which can typically reduce gasoline imports by more than one-third per year. Not only does ethanol production reduce imported gasoline but it is also responsible for reducing the consumption of oil. If the United States were able to produce seven and a half billion gallons of ethanol per year it would eliminate the need for 80,000 barrels of oil per day. America could greatly reduce its trade deficit by reducing the imports of crude oil. The environment is also positively affected by the use of ethanol. Ethanol is an environmentally friendly fuel. It is much cleaner than gasoline and reduces the effects of man-made carcinogens that are put into the air from fossil fuel-based gasoline. Gasoline that is blended with ethanol reduces the impact of harmful tailpipe emission of carbon monoxide, and other ozone-damaging pollutants. It is easy to see how the demand for ethanol blended fuels has affected the value of corn drastically.

The price farmers are able to charge for corn due to the demand for ethanol has had an impact on the price of many other products that rely on corn crops. The price of meat is tied directly to the price of the feed along with the price of dairy and poultry products. Many animals that are raised for human consumption feed off corn.

"A lot of the food in supermarkets is directly linked to the grain corn farmers plant to feed their animals". Brittany Saucer references a professor of agriculture economics at Purdue University, Wally Tyner, in her article titled "Ethanol Demand Threatens Food Prices". In her article she writes that Wally Tyner said, "All things that use corn are going to have higher prices and higher costs, to some extent, that will be passed on to consumers. The impact of this is being felt first in animal feed, particularly poultry and pork. Poultry feed is about two-thirds corn; as a result the cost to produce poultry-both meat and eggs' has already risen about fifteen percent due to the prices of corn. Also expect corn syrup used in soft drinks to get more expensive". The cost of feed for livestock and other expenses accrued on livestock farms account for about half of the commercial price of meat and eggs. The increasing prices in corn-related products have caused quite a bit of concern over inflation. So many products found in grocery markets are derived from corn crops. Americans are not the only ones affected from the increasing prices in corn. Mexico has felt the ripple effect as well. It has been reported that corn tortillas have practically doubled in price. This increasing price has sparked

inflation rates in Mexico and their government recently posed a deal for grocery markets

to put a limit on the price charged for tortillas. Eventually prices are going to become so high that the public is not going to be willing to pay. Unfortunately, there are so many items produced from corn and individuals are going to have to decide how valuable these products are to their daily lives. With the prices