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Crop-Based Biofuel Production under Acreage Constraints and Uncertainty

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Author Info
Mindy L. Baker
Dermot J. Hayes () (Center for Agricultural and Rural Development (CARD), Food and Agricultural Policy Research Institute (FAPRI))
Bruce A. Babcock () (Center for Agricultural and Rural Development (CARD), Midwest Agribusiness Trade Research and Information Center (MATRIC))

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Abstract

A myriad of policy issues and questions revolve around understanding the bioeconomy. To gain insight, we develop a stochastic and dynamic general equilibrium model and capture the uncertain nature of key variables such as crude oil prices and commodity yields. We also incorporate acreage limitations on key feedstocks such as corn, soybeans, and switchgrass. We make standard assumptions that investors are rational and engage in biofuel production only if returns exceed what they can expect to earn from alternative investments. The Energy Independence and Security Act of 2007 mandates the use of 36 billion gallons of biofuels by 2022, with significant requirements for cellulosic biofuel and biodiesel production. We calculate the level of tax credits required to stimulate this level of production. Subsidies of nearly $2.50 per gallon to biodiesel and $1.86 per gallon to cellulosic biofuel were required, and long-run equilibrium commodity prices were high, with corn at $4.76 per bushel and soybeans at $13.01 per bushel. High commodity prices are due to intense competition for planted acres among the commodities.

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Publisher Info
Paper provided by Center for Agricultural and Rural Development (CARD) at Iowa State University in its series Center for Agricultural and Rural Development (CARD) Publications with number 08-wp460.

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Date of creation: Feb 2008
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Handle: RePEc:ias:cpaper:08-wp460

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Related research
Keywords: biodiesel; biofuels; cellulosic; dynamic; ethanol; general equilibrium Monte Carlo; market.;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Satheesh V. Aradhyula & Matthew T. Holt, 1988. "Risk Behavior and Rational Expectations in the U.S. Broiler Market," Center for Agricultural and Rural Development (CARD) Publications 88-wp33, Center for Agricultural and Rural Development (CARD) at Iowa State University. [Downloadable!]
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  2. Miranowski, John & Orazem, Peter, 2003. "A Dynamic Model of Acreage Allocation with General and Crop-Specific Capital," Staff General Research Papers 10695, Iowa State University, Department of Economics.
  3. Rozakis, S. & Sourie, J. -C., 2005. "Micro-economic modelling of biofuel system in France to determine tax exemption policy under uncertainty," Energy Policy, Elsevier, vol. 33(2), pages 171-182, January. [Downloadable!] (restricted)
  4. Simla Tokgoz & Amani Elobeid & Jacinto F. Fabiosa & Dermot J. Hayes & Bruce A. Babcock & Tun-Hsiang (Edward) Yu & Fengxia Dong & Chad E. Hart & John C. Beghin, 2007. "Emerging Biofuels: Outlook of Effects on U.S. Grain, Oilseed, and Livestock Markets," Center for Agricultural and Rural Development (CARD) Publications 07-sr101, Center for Agricultural and Rural Development (CARD) at Iowa State University. [Downloadable!]
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  5. Elobeid, Amani & Tokgoz, Simla & Hayes, Dermot J. & Babcock, Bruce A. & Hart, Chad E., 2007. "Long-Run Impact of Corn-Based Ethanol on the Grain, Oilseed, and Livestock Sectors: A Preliminary Assessment, The," Staff General Research Papers 12717, Iowa State University, Department of Economics.
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  6. Paulson, Nicholas D. & Ginder, Roger, 2007. "Growth and Direction of the Biodiesel Industry in the United States, The," Staff General Research Papers 12813, Iowa State University, Department of Economics. [Downloadable!]
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  7. Shapouri, Hosein & Duffield, James A. & Graboski, Michael S., 1995. "Estimating the Net Energy Balance of Corn Ethanol," Agricultural Economics Reports 34005, United States Department of Agriculture, Economic Research Service. [Downloadable!]
  8. Eckstein, Zvi, 1984. "A Rational Expectations Model of Agricultural Supply," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 1-19, February. [Downloadable!] (restricted)
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  1. McPhail, Lihong Lu & Babcock, Bruce A., 2008. "Short-Run Price and Welfare Impacts of Federal Ethanol Policies," Staff General Research Papers 12943, Iowa State University, Department of Economics. [Downloadable!]
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