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The sustained increase in the price of corn beginning in late 2006 has its roots in a number of
changes in U.S. government policy. In the early 2000s, a number of states began to ban the use of MTBE
(methyl tertiary butyl ether), a compound used as an additive in gasoline to enhance octane ratings and
engine performance, because of concerns that it was carcinogenic. Ethanol, a colorless flammable liquid
that is used in a variety of applications including alcoholic beverages, solvents, and scents, began
increasingly to be used as a substitute for MBTE, and nearly all ethanol made in the United States is
produced from corn. The move toward corn-based ethanol as an additive in gasoline accelerated in
2005, when the Congress removed liability protection from refining companies that added MTBE to the
gasoline they produced. In the mid-2000s, the switch from MTBE to ethanol increased the demand for
corn-based ethanol and thus increased the demand for corn.
In addition, in 2005 and again in 2007, Congress passed energy bills that contained schedules of
“renewable fuel mandates,” requirements that called for minimum levels of consumptions of renewable
fuels used in the United States between 2009 and 2022. The mandates called for a sharp increase in the
amount of corn-based ethanol consumed until 2015, at which point the growth in renewable fuel con-
sumption would come from other renewable fuels. The renewable fuel mandates resulted in an increase
in the amount of ethanol-based fuel produced in the United States (such as E85, a blend consisting of
85 percent ethanol and 15 percent gasoline) and thus increased the demand for corn even more. The
increased demand for corn that resulted from the growing use of ethanol in the United States is a key
reason why the U.S. corn price rose sharply in 2007
and 2008. The Congressional Budget Office estimates
that of the $1.75 per bushel increase in the price of
corn from April 2007 to April 2008 (i.e., from $3.39 to
$5.14), 28 percent to 47 percent of the increase can be
attributed to the increased demand from U.S. ethanol
producers. 1
So what accounted for the remaining portion of
the large increase? Part of the increase was due a
growth in demand for corn resulting from the rapid
expansion of the U.S. and global economies that
took place during the “bubble” years of 2005–2008.
Another part of the increase was due to changes on
the supply side of the corn market. Increases in the
price of oil increased farmers’ production costs.
Furthermore, heavy rains and flooding in the U.S.
Corn Belt in early 2008 caused fear that a large
portion of the 2008 corn harvest would be wiped out.

1 “The Impact of Ethanol Use on Food Prices and Greenhouse-Gas
Emissions,” Congressional Budget Office (April 2009).

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