Ethanol, Mandates, and Drought: Insights from a Stochastic Equilibrium Model of the U.S. Corn Market

By Lihong Lu McPhail and Bruce A. Babcock

The outlook for U.S. corn markets is inextricably linked to what happens to the U.S. ethanol industry, which depends, in turn, on the level of government subsidies and mandates. The authors develop a stochastic partial equilibrium model to simulate outcomes for the corn market for the 2008/09 marketing year to gain insight into these linkages.

The model includes five stochastic variables that are major contributors to corn price volatility:

> planted acreage, corn yield, export demand

> gasoline prices and capacity of the ethanol industry