Introduction

By analyzing the relationships among agricultural subsidies, ethanol markets, and corn markets, this research contributes to the existing agricultural economics literature. The study brings the three topics together in a framework that allows for dynamic relationships and interdependencies among key variables. Corn and ethanol production are naturally interdependent because corn is the main feedstock used to produce ethanol, and likewise ethanol is becoming a significant determinant in farmers’ production decisions regarding corn. Government support programs are then brought into question due to the significant number of tax dollars that feed the different subsidies, as juxtaposed with the increased demand and thus profitability of the corn industry.

        A specific case in which ethanol acts as an exogenous shifter in the demand for corn allows for the effects of ethanol production on corn prices to be analyzed. The use of ethanol has come under heavy debate where strong opinions have formed on both fronts. The purpose of this paper, therefore, is to shed light on ethanol and corn markets in order to better understand the place of agricultural subsides. 

The Literature