Abstract
Rising petroleum prices, growing incomes in developing nations, and changes in energy policy around the world are having a significant effect on agricultural markets as biofuels begin to play a more substantial role in meeting the world’s energy needs. Some see biofuels as a means to reduce carbon emissions, increase energy independence, and raise farm income. Others note that the new demand for commodities to produce biofuels can lead to higher food prices, potentially undermining food security, and bring about unintended environmental consequences from expanding crop acreage that may result in greater carbon emissions. While there are a large number of studies that examine the influence of biofuels and biofuel policy on the prices of agricultural commodities, one poorly understood impact of greater biofuel production is how these changes have affected commodity price volatility. Price volatility is important for food security, farm income, policy formation, and investment behavior. We examine how greater biofuel production, whether motivated by policy or market prices, might change commodity price volatility in the future.
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Notes
- 1.
Fuel, electricity and oil accounted for 6% of total farm costs in 2000–2006 and fertilizer and lime account for as much (USDA ERS (http://www.ers.usda.gov/Data/FarmIncome/FinfidmuXls.htm). Fuel, electricity and transportation account for almost 10% of the margin between farm and consumer prices (USDA ERS (http://www.ers.usda.gov/data/FarmToConsumer/marketingbill.htm).
- 2.
Methyl tertiary butyl ether (MTBE) serves as a lead-free additive to gasoline to raise its octane. Motor fuels with MTBE burn differently and generate fewer emissions of certain types, leading to its historical eligibility to serve as an additive that alters fuels so that they meet regulatory standards in certain areas or at certain times. However, MTBE can have other harmful effects on human health if leaked into groundwater, so it was replaced by ethanol by 2006.
- 3.
This does not account for other feed grains or the feed coproduct from wet and dry mill ethanol production.
- 4.
There are likely to be provisions in the regulations that allow blenders some flexibility in the timing of their obligation, potentially reducing the inelasticity resulting from the mandate. EISA provisions to waive mandates also represent a source of flexibility.
- 5.
The choice here to impose the mandate at the quantity of the initial no-mandate equilibrium is solely for exposition purposes. There is no reason to expect that the mandated quantity will be exactly equal to the quantity the market would settle on without a mandate.
- 6.
The ethanol tariff is maintained as though it is attached to the credit. The potential for import surges if these policies are not tied together is not discussed here.
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Meyer, S., Thompson, W. (2010). Demand Behavior and Commodity Price Volatility Under Evolving Biofuel Markets and Policies. In: Khanna, M., Scheffran, J., Zilberman, D. (eds) Handbook of Bioenergy Economics and Policy. Natural Resource Management and Policy, vol 33. Springer, New York, NY. https://doi.org/10.1007/978-1-4419-0369-3_9
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