Increased Industrial Uses of Agricultural Commodities: Policy, Trade and Ethanol

By Lee, Hyunok; Glauber, Joseph W. et al. | Contemporary Economic Policy, July 1994 | Go to article overview
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Increased Industrial Uses of Agricultural Commodities: Policy, Trade and Ethanol


Lee, Hyunok, Glauber, Joseph W., Sumner, Daniel A., Contemporary Economic Policy


I. INTRODUCTION

Agriculture has provided product components other than food and fiber. Early in the industrial revolution, virtually all industrial inputs (such as inks, lubricants, and coatings) came from plant and animal sources. In those predominantly agrarian days, agriculture served as a major source of inputs to industrial production. Industrialization substituted non-agricultural ingredients for those with agricultural sources. Particularly, abundant petroleum sources began replacing agricultural ingredients, which had become relatively more costly.

Two main factors account for the renewed interest in developing and expanding industrial uses for materials traditionally used for food or livestock feed. (i) Over the past two decades, American agriculture doubled its total factor productivity, a rate of growth much faster than that of the industrial sector. Other industrial countries have followed the same pattern. The falling relative price of farm commodities has stimulated the search for alternative markets. Industrial uses are a potential source of additional demand. (ii) Increased environmental awareness has enhanced demands for "bioproducts" based on natural ingredients. Often, bio-based natural products have favorable environmental properties, as compared to petroleum based substitutes.

Examples of industrial uses are diverse: transportation fuels, biodegradable polymers, bio-pesticides, lubricants, resins, adhesives, waxes, gums, latexes, coatings, inks, pharmaceutical, newsprint, and food additives. Feedstocks for industrial uses also range from traditional crops such as corn or soybeans to new crops such as kenaf.

Expanded demand for agricultural materials as feedstocks for industrial products obviously influences the raw material markets. Agricultural resources shift from producing one crop to producing another. Likewise, one industry's welfare gain becomes another's loss. These adjustments clearly extend to international markets as well.

This paper examines the evolving policy toward ethanol, the most significant example of new industrial uses for agricultural products. The analysis here focuses on three seemingly unrelated but interacting policies--U.S. environmental policy, the domestic corn price and income support program, and foreign agricultural trade policy. The interaction among these policies creates unanticipated economic consequences.

Technical amendments to the U.S. Clean Air Act related to air pollution in major urban areas are expanding the demand for ethanol. The resulting shift out in the demand for corn raises its market price and lowers the Federal farm program cost as well as the economic deadweight cost of the U.S corn program. In addition, the supply of corn gluten feed, a co-product to ethanol manufacture, increases. The United States exports corn gluten feed to Europe in response to (i) a loophole in European Union (EU) agricultural trade barriers and to (ii) the Common Agricultural Policy (CAP) which makes grain expensive to the European livestock industry. The CAP recently was revised in response to EU budget pressures and international pressure from the Uruguay Round of General Agreement on Tariffs and Trade (GATT) negotiations. This paper shows how analysis of the effect of the U.S. urban Clean Air Act must consider changes in European farm programs. (See Fraas and McGartland, 1990, and Rowe et al., 1990, for earlier analysis that did not consider trade consequences.)

II. INDUSTRIAL USES AND ETHANOL

Industrial uses--or "new uses" in popular jargon--are nonfood/nonfeed uses of agricultural and forestry products. More specifically, new uses include (i) new uses of old, traditional crops such as corn and soybeans, (ii) new crops such as kenaf and jojoba for new and old uses, and (iii) new uses for agricultural wastes and residue. Feedstocks for new uses fall into three groups according to dominant component: starch, oil, and fiber.

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