Farm Futures, IL
09-26-06
Iowa State Study Shows Trade Barriers Bolster U.S. Ethanol Prices
Researchers compare Brazil and U.S. market and say without government
programs more ethanol would be imported.
Farm Futures staff
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 countryspecific 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.