demand

Events external to agriculture have set in motion the conditions for structural change in the marketing of corn in the U.S. These included a rapid increase in the price of crude oil from $40 per barrel to over $100 caused by hurricanes, geopolitical events, an increased global demand for energy from countries like China and India, and in December 2007, the U.S. raising the renewable fuel standards. The results of this research show that there could be significant changes in the historical utilization and marketing of corn in the U.S. The change in movement patterns provides one source of visible evidence that a structural change is underway.

The market for E85�a fuel blend of 85 percent ethanol and 15 percent gasoline�is small
but growing rapidly. I use data for E85 sales at fueling stations in Minnesota to estimate
demand for E85 as a function of retail E85 and gasoline prices. I find that demand is
highly sensitive to price changes, with an own-price elasticity as high as -13 and a gasolineprice
elasticity as high as 16 at sample mean price levels. Demand is most sensitive to
price changes when the relative price of E85 is at an intermediate level, at which point
small price changes induce fuel switching by a large number of consumers. These results
are qualitatively consistent with a simple theoretical model of E85 demand, and the large
elasticities are in line with previous literature that estimates demand for fuels with nearperfect
substitutes. I estimate that roughly 40�50 percent of current E85 consumers are
fuel switchers, and that the average fuel-switching consumer is indifferent between the two
fuels when the ratio of gasoline to E85 prices is about 1.05�1.15. These ratios are somewhat
smaller than the ratio of gasoline to E85 fuel economy implied by government tests of
flex-fuel vehicles but consistent with reports on E85 fuel economy in the popular press.