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Midwest Drought: Is It the Cause of Higher Gasoline Prices?

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The drought ravaging corn fields across the U.S. has caused the price of corn to jump 60 percent in three months. This has prompted meat and poultry producers as well as lawmakers to call for a suspension of the nation's ethanol mandate. The Renewable Fuels Standard (RFS), which became law in 2007, requires that 13.2 billion gallons of biofuels such as ethanol be blended with gasoline this year; that number jumps to 13.8 billion gallons in 2013.

RFS was designed to lower the nation's dependence on foreign imports of crude oil. Forty percent of the corn grown in the U.S. goes toward ethanol production but that could increase to 42 percent next year.The USDA noted that five billion bushels of corn were directed for the use of ethanol this year.

The nation's depleted corn supply forced the price of corn to reach a record high of $8.49 a bushel on Aug. 10 after the government reported it was cutting its annual corn harvest by 13 percent to 10.8 billion barrels, the lowest level in six years.

More than 25 U.S. senators, 156 House members and at least three state governors are asking the head of the Environmental Protection Agency to waive the ethanol requirement, arguing that feeding the country's livestock should come before ethanol production. The drought, believed to be the worst in 56 years, could significantly add upward pressure to meat, dairy and poultry prices for U.S. consumers by early next year.

Jose Graziano da Silva, director-general of the United Nations' Food and Agriculture Organization, said he supports a temporary ban of U.S. ethanol production to let more corn be used for food and livestock feed. Agriculture Secretary Tom Vilsack told Bloomberg last week that a "waiver may bring long-term harm to ethanol investment without having a major effect on food price…my concern is that we send a signal to investors of perhaps, less confidence in the industry."

The Obama administration said it would review the country's ethanol policy amid calls to reduce the ethanol mandate.

Wallace Tyner, a professor of agricultural economics at Purdue University, co-wrote a paper that analyzed the impact of a partial ethanol waiver on corn and gasoline prices. Tyner says higher prices at the pump, which have jumped 38 cents on average in one month, cannot be blamed entirely on the ethanol quota.

"We're paying a little bit more now because of the drought," Tyner says in an interview with The Daily Ticker. "Ethanol has gone up about 60 cents in the last six weeks. What you get at the pump is 10 percent ethanol. Six cents of that pump price increase is roughly due to ethanol which means it's due to the drought."

Tyner says he doubts the EPA will issue an ethanol waiver for 2012.

"Nothing the EPA can do can change the economic damage done by the drought - that is given," he notes. "All they can do is redistribute it among corn growers, livestock producers, ethanol producers and consumers."

Tyner also argues that gasoline refiners currently have very little economic incentive to reduce the ethanol blend. Corn ethanol costs less than regular gasoline on a volume per gallon basis. But that could change if corn prices continue to escalate and the price of ethanol surpasses the price of gasoline by a significant margin. Ethanol production has already fallen 8 percent over the last seven weeks due to higher corn prices, according to Tyner's research.

More from The Daily Ticker

Gas Prices Will Continue to Rise Until U.S. Builds More Refineries: GasBuddy Analyst

Food Prices Heading Higher: Midwest Drought Takes Heavy Toll

"Completely Wasteful": Steven Rattner Slams Govt. Support for Corn Ethanol


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