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The Theory of Biofuel Policy and Food Grain Prices

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  • Drabik, Dusan

Abstract

We develop an analytical framework to assess the market effects of alternative biofuel policies (including subsidies to feedstocks). U.S. corn-ethanol policies are used as an example to study the effects on corn prices. We determine the ‘no policy’ ethanol price; analyze the implications for the ‘no policy’ corn price and resulting ‘water’ in the ethanol price premium due to policy; and generalize the unique interaction effects between mandates and tax credits to include ethanol and corn production subsidies. The effect of an ethanol price premium depends on the value of the ethanol by-product, the value of production subsidies, and where the world ethanol price is determined. U.S. corn-ethanol policies are a major reason for the increases in corn prices – an estimated increase of 26 – 45% in the period 2008 – 2011.

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File URL: http://purl.umn.edu/126615
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Bibliographic Info

Paper provided by Cornell University, Department of Applied Economics and Management in its series Working Papers with number 126615.

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Date of creation: 2011
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Handle: RePEc:ags:cudawp:126615

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Related research

Keywords: biofuel policies; corn prices; tax credit; mandate; ethanol subsidy; corn subsidy; water; price premium; Agricultural and Food Policy; Production Economics; Resource /Energy Economics and Policy; Q02; Q18; Q19;

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References

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  1. Drabik, Dusan & de Gorter, Harry & Just, David R., 2010. "The Implications of Alternative Biofuel Policies on Carbon Leakage," Working Papers 126975, Cornell University, Department of Applied Economics and Management.
  2. Jingbo Cui & Harvey Lapan & GianCarlo Moschini & Joseph Cooper, 2011. "Welfare Impacts of Alternative Biofuel and Energy Policies," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 93(5), pages 1235-1256.
  3. Stephen P. Holland & Jonathan E. Hughes & Christopher R. Knittel & Nathan C. Parker, 2011. "Some Inconvenient Truths About Climate Change Policy: The Distributional Impacts of Transportation Policies," NBER Working Papers 17386, National Bureau of Economic Research, Inc.
  4. Mallory, Mindy L. & Irwin, Scott H. & Hayes, Dermot J., 2012. "How market efficiency and the theory of storage link corn and ethanol markets," Energy Economics, Elsevier, vol. 34(6), pages 2157-2166.
  5. Hochman, Gal & Rajagopal, Deepak & Timilsina, Govinda & Zilberman, David, 2011. "The role of inventory adjustments in quantifying factors causing food price inflation," Policy Research Working Paper Series 5744, The World Bank.
  6. Harry de Gorter & David R. Just, 2007. "The Welfare Economics of a Biofuel Tax Credit and the Interaction Effects with Price Contingent Farm Subsidies," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(2), pages 477-488.
  7. Headey, Derek & Fan, Shenggen, 2010. "Reflections on the global food crisis: How did it happen? How has it hurt? And how can we prevent the next one?," Research reports 165, International Food Policy Research Institute (IFPRI).
  8. Harry de Gorter & David R. Just, 2008. "The Economics of a Blend Mandate for Biofuels," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(3), pages 738-750.
  9. Brian D. Wright, 2011. "The Economics of Grain Price Volatility," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 33(1), pages 32-58.
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Citations

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Cited by:
  1. de Gorter, Harry & Drabik, Dusan & Timilsina, Govinda R., 2013. "Should Zambia produce biodiesel from soybeans ? some insights from an empirical analysis," Policy Research Working Paper Series 6498, The World Bank.
  2. de Gorter, Harry & Drabik, Dusan & Kliauga, Erika M. & Timilsina, Govinda R., 2013. "An economic model of Brazil's ethanol-sugar markets and impacts of fuel policies," Policy Research Working Paper Series 6524, The World Bank.
  3. Rausser, Gordon C. & de Gorter, Harry, 2013. "US policy contributions to agricultural commodity price fluctuations, 2006.12," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  4. Cooper, Kristen & de Gorter, Harry & Drabik, Dusan, 2012. "Welfare Effects of Biofuel Policies in the Presence of Fuel and Labor Taxes," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124763, Agricultural and Applied Economics Association.
  5. Drabik, Dušan & de Gorter, Harry, 2013. "Emissions from Indirect Land Use Change: Do they Matter with Fuel Market Leakages?," Review of Agricultural and Applied Economics (RAAE), Faculty of Economics and Management, Slovak Agricultural University in Nitra Provider-Homepage: http://www.roaae.org & Association of Agricultural Economists in Slovakia (APES), vol. 16(2).

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