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Climate change, biofuels mandate would cause corn price spikes

April 24, 2012
WEST LAFAYETTE, Ind. - A study from Purdue and Stanford university researchers predicts that future climate scenarios may cause significantly greater volatility in corn prices, which would be intensified by the federal biofuels mandate.

The findings, published this week in the journal Nature Climate Change, show that severely hot conditions in corn-growing regions and extreme climate events that are expected to impact supply would cause swings in corn prices. When coupled with federal mandates for biofuel production, the price volatility could increase by about 50 percent over the period from 2020-2040 as compared to recent history.

"There could be quite a substantial increase in yield volatility, and that's due to the increased frequency and intensity of the high temperatures throughout the Corn Belt," said Thomas Hertel, a Purdue distinguished professor of agricultural economics. "Closer integration of the corn and energy markets through the ethanol industry could aid in buffering these shocks, but this would not occur in the presence of a mandate."

Under current rules, the federal government requires an increasing amount of ethanol and other biofuels be produced each year and blended with gasoline. Currently 39 percent of the nation's corn crop is used for ethanol, of which about one-third returns to the food system in the form of by-products fed to livestock.

The study used a high-resolution climate model for the United States that takes into account climate history to produce 25-kilometer "snapshots" of the Midwest under projected future climate scenarios, Hertel said. Five simulations from 1950-2040 were combined to estimate future temperature extremes. Those predictions were paired with a model that uses temperature, precipitation and technology trends to predict corn yields.

The study finds that even if temperatures stay within the internationally recognized climate change target - a limit of 3.6 degrees Fahrenheit above pre-industrial levels - global warming is still enough to make damaging heat waves much more common over the U.S. Corn Belt.

"Severe heat is the big hammer," said Noah Diffenbaugh, assistant professor of earth sciences at Stanford University and a study co-author. "We find that even one or two degrees of global warming is likely to increase heat waves enough to cause much higher frequency of low-yield years, leading to greater volatility of corn prices."

Using Purdue's Global Trade Analysis Project model and ignoring potential adaptations, the researchers predicted U.S. corn price volatility over the 2020-2040 period as compared with the 1980-2000 period. This increase would be further exacerbated by biofuel mandates, which would result in a further 50 percent increase in price volatility, Hertel said.

Under the projection, prices would rise in years when corn yields are hurt by extremely hot days. Hertel said that ethanol plants, forced to meet the federal mandate for biofuel production, would be forced to bid up corn prices in order to meet the blend requirement, thereby exacerbating the effect of the production shortfall on livestock producers and consumers.

Hertel said the study holds all other factors constant. It's possible that plant breeding to raise the temperature threshold at which yield losses occur, increased stockholding activities by farmers and agribusinesses, shifting growing areas northward, or changes in federal regulations could moderate the projected increases in price volatility. Finally, the study assumes that the so-called "blend wall," which has played a key role in limiting increases in ethanol use in gasoline, would be relaxed as the automobile stock is modernized.

Purdue University

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