An analysis of government policy impacts in the ethanol and sugar markets

Abstract

This study determines the impact of U.S. government policies on U.S. ethanol market and its consequences for the U.S. corn, sugar, and HFCS markets. Using corn as the primary input in ethanol and HFCS production in the United States, along with the substitutability between sugar and HFCS, has linked the U.S. ethanol market to the U.S. HFCS, sugar, and corn markets. To address the problem, two sets of data, quarterly and annual data, were collected and a simultaneous econometric model was constructed. Estimated results show that the “2007 Energy Independence and Security Act” will increase the domestic corn price and ethanol and HFCS production costs. Increases in HFCS production costs decrease the comparative advantage of HFCS over sugar and will encourage HFCS users to replace HFCS with sugar. HFCS will lose its comparative advantage over domestic raw sugar after 2009. Without government policies that mandate consumption levels for ethanol, depending on gasoline and corn prices, maximum corn-based ethanol production would be between 1.5 and 19.6 billion gallons per year in year 2015. In the case of having “mandatory ethanol consumption,” there will be a minimum quantity of ethanol consumption and production, equal to 15 billion gallons per year in 2015. Depending on the relative levels of corn and gasoline prices, annual corn-based ethanol production will be between 15 and 19.6 billion gallons in 2015. With regards to the profitability of sugar-based ethanol production, the U.S. sugar support program plays a critical role. Using raw sugar, at world sugar price levels, for producing ethanol, sugar can compete with corn when corn prices reach $5.49 per bushel, when the ethanol production level approaches 9.3 billion gallons annually. With the sugar support program in force, raw and refined sugar cannot compete with corn in the near future. Removal of the sugar import quota decreases sugar production and price while sugar imports and consumption increase. This allows sugar to be considered as a viable feedstock for the production of ethanol. Using sugar for ethanol production reduces the amount of corn needed for ethanol production, suppresses the corn price, and stabilizes the corn market.