Conditional Suspension of the US Ethanol Mandate using Threshold Price inside a Competitive Storage Model

Abstract

In 2012, EPA turned down request to suspend the US ethanol mandate on the ground that doing so would not result in lower corn prices. Given that ethanol pro- duction accounts for more than 40 percent of the US annual corn harvest together with current trend of extreme weather events, it is likely that a similar request will resurface in the future. We therefore use a competitive storage model to investigate how a waiver of the US ethanol mandate, conditional on high corn price, might affect corn prices and consume welfares. It is found that although waiving the mandate when the price was at the level in 2012 would only result in moderate decrease of long run corn prices, the price volatility reductions are much larger. In addition, if the US corn yield in 2013 is as low as it was in 2012, suspending 20 percent of the mandate in 2012 will result in a price drop of 18 percent in 2013, higher than EPA's estimate of less than 1 percent. Associated with lower corn price is a gain of 7.69 billion dollars in US consumer welfares.