MANHATTAN, Kan. – Rising and falling gasoline prices are not only affecting what Kansans pay at the pump, but also shaping demand for biofuels and the outlook for key agricultural commodities.
As demand for biofuel grows, experts say producers are becoming more closely tied to fluctuations in fossil fuel markets.
“(Biofuels) clearly links the fortunes of U.S. Corn Belt agriculture more closely to what’s going on in the broader fossil fuels markets,” said Scott Irwin, an agricultural economist at the University of Illinois, speaking on a recent episode of the Kansas State University podcast Agriculture Today.
That connection, Irwin said, is not always negative. While higher crude oil prices can increase input costs, they can also strengthen demand for biofuels, such as ethanol.
“High crude oil prices are not necessarily bad for biofuels, (and) therefore not necessarily bad for Corn Belt agriculture,” Irwin said.
At the same time, experts caution against oversimplifying the relationship between energy and agricultural markets. The effects can differ widely depending on the type of biofuel, shifting input costs and broader global market conditions.
The U.S. produces roughly 1.5 million barrels of biofuels each day, which Irwin notes is a major contributor, as the U.S. consumes roughly 20 million barrels of petroleum per day.
“(People need to) think differently about corn ethanol versus soybean oil biodiesel and how the entire market economics work,” he said.
Ethanol, in particular, has evolved from a niche renewable fuel into a commodity closely tied to the same economic forces that drive fossil fuel markets. As a result, Irwin said, its value and impact on agriculture now rise and fall alongside crude oil and gasoline prices.
“Ethanol is now driven by the economics of fossil fuels; it’s just part of the gang,” Irwin said.
Another commonly debated topic is the role of policy mandates in ethanol use. However, Irwin explains that market fundamentals, especially ethanol’s octane value, play a significant role regardless of policy changes.
“(Policy makers) can remove all the mandates they want. (Consumers are not) going to use one gallon less ethanol because of its octane value,” Irwin said.
Ethanol contains almost two-thirds as much energy per gallon as gasoline, meaning vehicles may travel slightly fewer miles per gallon. But it remains widely used as it boosts octane levels, helping fuel burn more efficiently and reducing engine knocking.
The expansion of ethanol production has had a lasting impact on corn markets, helping support higher prices over time.
“Without the ethanol boom in the early 2000s, we would have a hard time seeing average corn prices get above $3.25 to $3.50 per bushel,” Irwin said.
That shift represents a significant change in the economic landscape for producers, influencing land values, input decisions and long-term planning.
When looking ahead, as global production continues to increase and yields improve, Irwin notes that future challenges may center less on shortages and more on managing potential surpluses in agricultural markets.
Irwin added: “What I worry about more than anything is not deficits in the next 10 years, but surpluses because of rising acreage and continued gains in yields.”
The full conversation with Irwin and others is available online at https://agtodayksu.libsyn.com.
