The Global Costs of American Ethanol

World leaders are focused on agricultural supply data, insurance schemes and speculation as they try to quell volatility in global food markets. They should also turn their attention to perhaps the leading cause of price instability: U.S. ethanol policy.

Five years ago, few if any food or energy experts predicted that 40 percent of the U.S. corn crop in 2011 would be devoted to ethanol production. Nor did they imagine: that corn prices would reach all-time highs at $8 per bushel ($275 per metric ton); that July futures prices for corn in Chicago would exceed those for wheat; that the United States would be exporting ethanol to Brazil; or that an Iowa Senator would co-sponsor a bill to reduce corn-based subsidies just prior to the Iowa Caucuses for the 2012 primary season. What has caused these extraordinary circumstances? And what are the economic, political and food-security implications of a revolution in demand that has caught both economists and political leaders unaware?