All the models used in this study are calibrated on 2005 data. A 10-year baseline is generated for the period between 2006 and 2015. Elasticity values for supply and demand
responses are based on econometric analysis and on consensus estimates.2In general, data for ethanol supply and utilization were obtained from the F.O. Lichts online database, the Food and Agriculture Organization (FAO) of the United Nations (FAOSTAT Online 2006), the
Production, Supply and Distribution View (PS&D) of the U.S. Department of Agriculture (USDA), and the European Commission Directorate General for Energy and Transport.
Macroeconomic data such as real GDP, GDP deflator, population, and exchange rate were gathered from the International Monetary Fund and Global Insight.
The U.S. ethanol price is the FOB average rack price for Omaha, Nebraska, and the unleaded gasoline price is the FOB average rack price for Omaha, Nebraska, provided by the Nebraska Ethanol Board. The crude oil price is the refiners’acquisition cost of imported crude oil obtained from the Energy Information Administration (EIA). The corn price is the farm price from the USDA National Agricultural Statistics Service online database. The natural gas utility price index is from Global Insight. The DDGS, gluten meal, gluten feed and corn oil prices were obtained from the USDA Economic Research Service (ERS). U.S. gasoline consumption is the finished motor gasoline demand from EIA.
Data for Brazilian ethanol supply and utilization, ethanol and sugar prices, sugarcane data,and Brazilian gasolineconsumption wereobtained from theAttachéReportsofUSDA’s Foreign Agriculture Service. Ethanol prices are for anhydrous ethanol provided on a monthly basis for the State of São Paulo, Brazil. Flex-fuel and other vehicle data were obtained from the ANFAVEA (2005) and vehicle projections were obtained from UNICA (2006).
2Details on elasticity values are available from the authors upon request.
5.2 Scenarios
The study analyzes three scenarios in which shocks to gasoline, corn, and sugar prices are introduced exogenously to the baseline. Furthermore, the shocks are given at 20% for each commodity starting in 2006 and covering the period to 2015. The scenario results are given in terms of averages for the period 2006 to 2015. Tables 1, 2, and 3 present the summary results in average terms for the 20% shock for gasoline, corn, and sugar, respectively. Detailed results for all scenarios are provided in Appendix II.3
5.2.1 Gasoline Price Shock
A 20% shock in gasoline price in the U.S. results in an almost 4% decline in composite gasoline consumption (Table 1). The share of fuel ethanol in composite gasoline consumption increases by 2.5% because of the substitution of gasoline blended with ethanol for gasoline blended with other additives. However, total ethanol consumption declines by 1.5% because the complementarity relationship overrides the substitution effect. Composite gasoline consumption overall declines as consumers drive less and consume less of all fuels, including blends. The fall in total ethanol consumption leads to a reduction in the U.S. domestic ethanol price and therefore profitability of ethanol plants. This results in a 0.7% reduction in ethanol production. Because of the lower demand for ethanol, the demand for feedstock declines. However, higher fuel prices result in higher cost of production for all crops. Therefore, the net effect on the price of corn is an increase of 0.6%. The price of DDGS, which is the by-product of predominant (dry-mill) processing, increases by 0.3% since less ethanol, and therefore less DDGS, is being produced.
The world ethanol price declines by about 1.9% because of the lower U.S. demand, since net U.S. imports decline by 16.7%. Brazil responds by reducing ethanol production by nearly
3The shocks on gasoline, corn, and sugar prices were also applied at 10% and 50%. Results are available from the
0.7% and increasing total ethanol consumption by 0.3% on average. In Brazil, the price of gasoline blended with ethanol goes up as the price of gasoline goes up. Therefore, the demand for gasohol falls and consequently the demand for anhydrous ethanol declines by 5.2%.
However, hydrous ethanol consumption goes up by 2.6% because of the substitution effect overriding the complementary effect as FFVs switch from gasohol to hydrous ethanol. This is in contrast to the historical trends in Brazil (see Figure 2), which show positive correlation between gasoline and ethanol prices. This is due to the decline in Brazilian net exports by 5.3% as U.S.
ethanol demand falls. The lower U.S. demand translates into a lower ethanol price. In Brazil alone, the positive correlation between gasoline and ethanol price can be maintained if export demand is held constant. With the decline in Brazilian ethanol production more sugarcane is diverted to sugar production. The increased supply of sugar leads to a reduction in sugar prices by 0.2%.
It is important to note that these results reflect the short run in which the number of FFVs in the U.S. is limited, which in turn restricts the substitution possibilities between gasoline and ethanol. In the long run, with the increase in FFVs in the U.S., substitution between gasoline and ethanol increases, and higher gasoline price would lead to higher ethanol consumption. Table D in Appendix II shows the results of a gasoline price shock scenario given an increase in FFVs in the U.S. We assume that FFVs will increase by 20% per year to 32 million units by 2015 from 4 million in 2004. Given this assumption, a 20% increase in gasoline price increases the share of fuel ethanol in composite gasoline consumption by 23.2% between 2006 and 2015. This results from a shift in consumption from gasoline to ethanol primarily by FFVs. Thus, total ethanol consumption in the U.S. increases by 17.4%. The higher demand for ethanol leads to an increase in the domestic ethanol price by 8.3%. U.S. net imports increase by 278.2% and consequently,
the world ethanol price increases by 34.9%. This shows that our results are critically dependent on the vehicle fleet composition.
5.2.2 Corn Price Shock
The 20% exogenous increase in the U.S. corn price reduces U.S. ethanol production by 3.7%, as net profit margins decline for ethanol plants (Table 2). Thus, the U.S. domestic ethanol price increases by 2.3%. The share of fuel ethanol in composite gasoline consumption decreases by 0.6% and total ethanol consumption declines by 0.6%. U.S. net imports increase by 56.5%, as the reduction in production exceeds the reduction in consumption.
The world ethanol price increases by 6.6% in response to higher U.S. imports. Brazilian production increases by 2.4% in response to the higher world price. Total ethanol consumption declines by 0.9%, with anhydrous ethanol consumption declining by 0.6% and hydrous ethanol, by 1%. Hydrous ethanol consumption responds more to a change in ethanol price than does anhydrous consumption, as the existence of FFVs increases the elasticity of demand with respect to price since consumers can switch easily between alternative fuels. The higher ethanol
production means that more sugarcane is diverted to ethanol production, thus reducing the supply of sugar in the world market. The price of raw sugar increases by nearly 0.6%. Brazilian ethanol net exports increase by 17.4% to meet the higher world ethanol demand.
5.2.3 Sugar Price Shock
The share of sugarcane going into ethanol production declines by 2.6% in Brazil when the raw sugar price is exogenously increased by 20% (Table 3). The resulting reduction in ethanol production increases the world ethanol price by 6.1%, as net exports of Brazil decline by nearly 10%. The higher ethanol price results in a 0.8% reduction in total ethanol consumption in Brazil.
The higher world ethanol price reduces U.S. net imports by 24.9%, which results in a tighter U.S. ethanol market and a 1.8% increase in the U.S. domestic ethanol price. Ethanol production increases by nearly 1%, as profit margins increase. Total ethanol consumption declines by 0.5%, as the share of fuel ethanol in composite gasoline consumption decreases by 0.5%. The increased demand for corn going into ethanol production in the U.S. increases the corn price by about 0.2%.
6. Conclusions
Given the rising interest in ethanol as a renewable fuel and the changing landscape of the fuel markets brought about by soaring crude oil prices, this study attempts to contribute to the literature by examining the underlying fundamentals of the ethanol market. Within this context, it is crucial to model the liaison between energy and agricultural markets, as the agricultural sector is increasingly becoming a source of energy through biofuel production. Already an established source of fuel in Brazil, ethanol is well on its way to becoming a mainstream fuel in the U.S.
Although the literature so far has centered on energy markets and the crude oil price, it is critical to understand the dynamics of the relationship between ethanol and corn markets in the U.S. and ethanol and sugar markets in Brazil. In the U.S., corn is the primary feedstock for the production of ethanol. Furthermore, corn is an important feed component in the U.S. livestock sector. U.S. corn net exports made up nearly 62% of world net trade of corn in 2005. Thus, any change in the U.S. corn market brought about by the emerging ethanol market will have a significant impact on the world corn market and on the U.S. livestock sector. On the other hand, in Brazil ethanol competes with sugar for sugarcane, and the expansion of ethanol production and use not only in Brazil but worldwide will have major ramifications for the Brazilian and
world sugar markets. To this end, we utilize a multi-market international ethanol model to analyze the impact of the gasoline price, the U.S. corn price, and the world sugar prices on both ethanol and commodity markets.
Given the emerging nature of ethanol markets, our analysis comes with some caveats.
Data availability and consistency is limited, which has led to the combination of different data sources. In this study, the complementarity relationship is considered to be more dominant than the substitution relationship between ethanol and gasoline in the U.S. However, this relationship is expected to change if the share of FFVs in the U.S. total vehicle fleet significantly increases as it has in Brazil. This may change the dynamics of how ethanol markets respond to a gasoline price change. Currently, corn serves as the major feedstock for ethanol production in the U.S.
However, if a long-term goal of energy independence is to be met, new sources of feedstock for ethanol need to be found. The addition of cellulosic and other biomass feedstock in the
production of ethanol may yet again change the structure of the market. The importance of corn as a feedstock may steadily decline. Although sugarcane is a lower-cost feedstock, the use of biomass may also change the relationship between ethanol and sugar markets.
The study finds that an increase in gasoline prices affects the U.S. and Brazilian ethanol markets differently because of the characteristic of their respective vehicle fleets. In the U.S.
where vehicles run either on gasoline or gasoline blended with 10% ethanol, the share of fuel ethanol in composite gasoline consumption increases. However, the total consumption of ethanol declines as total composite gasoline consumption decreases. In Brazil, where vehicles run on up to 25% blended gasoline and where the share of FFVs is increasing dramatically, the increase in gasoline prices leads to an increase in total ethanol consumption. Specifically, the consumption of anhydrous ethanol used in gasohol vehicles declines while the consumption of hydrous
ethanol used primarily in FFVs increases. The net effect is an increase in total ethanol
consumption. This result illustrates the importance of the composition of the vehicle fleet on the relative magnitudes of the complementarity and substitution relationships between ethanol and gasoline. Thus, the evolution of the vehicle fleet in the U.S. is critical in driving the direction of both ethanol price and consumption in the gasoline price shock scenario.
An increase in the U.S. corn price decreases the profit margin for ethanol plants and leads to a reduction in ethanol production. Consequently, the U.S. domestic ethanol price increases, making ethanol imports from Brazil relatively more attractive. The higher demand for ethanol imports in the U.S. increases the world ethanol price. Since Brazil is a low-cost producer of ethanol, it captures most of the increase in U.S. imports despite high import tariffs.
An increase in the world price of raw sugar diverts more sugarcane into the production of sugar relative to ethanol in Brazil. This results in lower production of ethanol and lower net exports from Brazil. The lower supply of ethanol in the world market leads to an increase in the world ethanol price. The results of the scenarios show that ethanol and sugar prices tend to move together in Brazil.
This study illustrates that the discussions about the role of ethanol as a fuel source need to take into consideration the response of world agricultural markets. The price of corn in the U.S.
is impacted by and impacts not only ethanol production, but also the prices of other crops in the U.S., area allocation, and the world corn market and how other countries respond to the price change. The impact also extends to the U.S. livestock sector through feed prices. This study is an attempt to show that special attention needs to be given to modeling the linkages between
energy, ethanol, and agricultural markets to understand the overall impact of a change in one market and the resulting spillover effects.
Table 1. Impact of 20 Percent Gasoline Price Shock on U.S. and Brazilian Ethanol Markets
Average 2006-2015 (US$/cwt) (US$/bushel)
World Ethanol Price Gasoline Price Raw Sugar Price Corn Price
Baseline 1.27 1.92 14.34 2.38
Scenario 1.25 2.30 14.31 2.39
% chg from baseline -1.91% 20.00% -0.17% 0.59%
(Ratio) (US$/gallon)
Total Ethanol Gasoline Share of Fuel Ethanol in Domestic
United States Production Consumption Net Imports Consumption Gasoline Consumption Ethanol Price
Baseline 7,064 7,459 396 152,797 0.046 1.95
Scenario 7,016 7,347 332 146,766 0.048 1.93
% chg from baseline -0.67% -1.49% -16.69% -3.97% 2.50% -1.03%
(Ratio)
Anhydrous Hydrous Total Ethanol Share of Sugarcane
Brazil Production Consumption Consumption Consumption Net Exports in Ethanol Production
Baseline 6,165 1,444 3,574 5,018 1,147 0.534
Scenario 6,121 1,369 3,665 5,034 1,087 0.532
% chg from baseline -0.69% -5.18% 2.60% 0.34% -5.28% -0.40%
Note: Gasoline consumption refers to total composite gasoline consumption, including unleaded gasoline and gasoline blended with ethanol.
(US$/gallon)
(Million Gallons)
(Million Gallons)
Table 2. Impact of 20 Percent Corn Price Shock on U.S. and Brazilian Ethanol Markets
Average 2006-2015 (US$/cwt) (US$/bushel)
World Ethanol Price Gasoline Price Raw Sugar Price Corn Price
Baseline 1.27 1.92 14.34 2.38
Scenario 1.35 1.92 14.42 2.86
% chg from baseline 6.57% 0.00% 0.55% 20.00%
(Ratio) (US$/gallon)
Total Ethanol Gasoline Share of Fuel Ethanol in Domestic
United States Production Consumption Net Imports Consumption Gasoline Consumption Ethanol Price
Baseline 7,064 7,459 396 152,797 0.046 1.95
Scenario 6,811 7,414 604 152,768 0.046 1.99
% chg from baseline -3.67% -0.62% 56.52% -0.02% -0.62% 2.25%
(Ratio)
Anhydrous Hydrous Total Ethanol Share of Sugarcane
Brazil Production Consumption Consumption Consumption Net Exports in Ethanol Production
Baseline 6,165 1,444 3,574 5,018 1,147 0.534
Scenario 6,315 1,434 3,538 4,973 1,343 0.541
% chg from baseline 2.41% -0.64% -1.02% -0.91% 17.44% 1.35%
Note: Gasoline consumption refers to total composite gasoline consumption, including unleaded gasoline and gasoline blended with ethanol.
(Million Gallons) (US$/gallon)
(Million Gallons)
Table 3. Impact of 20 Percent Raw Sugar Price Shock on U.S. and Brazilian Ethanol Markets
Average 2006-2015 (US$/cwt) (US$/bushel)
World Ethanol Price Gasoline Price Raw Sugar Price Corn Price
Baseline 1.27 1.92 14.34 2.38
Scenario 1.35 1.92 17.21 2.38
% chg from baseline 6.13% 0.00% 20.00% 0.19%
(Ratio) (US$/gallon)
Total Ethanol Gasoline Share of Fuel Ethanol in Domestic
United States Production Consumption Net Imports Consumption Gasoline Consumption Ethanol Price
Baseline 7,064 7,459 396 152,797 0.046 1.95
Scenario 7,132 7,423 292 152,774 0.046 1.98
% chg from baseline 0.99% -0.50% -24.90% -0.01% -0.50% 1.82%
(Ratio)
Anhydrous Hydrous Total Ethanol Share of Sugarcane
Brazil Production Consumption Consumption Consumption Net Exports in Ethanol Production
Baseline 6,165 1,444 3,574 5,018 1,147 0.534
Scenario 6,006 1,435 3,541 4,976 1,031 0.520
% chg from baseline -2.57% -0.60% -0.93% -0.83% -9.99% -2.57%
Note: Gasoline consumption refers to total composite gasoline consumption, including unleaded gasoline and gasoline blended with ethanol.
(US$/gallon)
(Million Gallons)
(Million Gallons)
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