Ethanol and Its Effect on the U.S. Corn Market: How the Price of E-85 Influences Equilibrium Corn Prices and Equilibrium Quantity

Abstract

This study analyzes the impact the market price of E-85 has on equilibrium price and quantity exchanged of corn in the U.S. market. After presenting the political history of federal interest and intervention in the ethanol market, this study employs reduced form equations and a multiplicative heteroskedasticity approach to show that the price of E-85 has a statistically significant impact on the equilibrium price of corn. The analysis also uses a derived demand argument to show that political intervention, which has encouraged the growth of the U.S. corn ethanol market, has a statistically significant effect on the equilibrium quantity exchanged of corn. The author concludes that an increase in the price of E-85 increases the equilibrium price of corn but due to capacity constraints in the ethanol market does not yet have a statistically significant effect on the equilibrium quantity exchanged of corn. The author also concludes that the political intervention that has fueled the growth of the domestic corn ethanol market increases the equilibrium quantity exchanged of corn but does not have a statistically significant effect on the equilibrium price of corn.