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Short-Run Price and Welfare Impacts of Federal Ethanol Policies

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Abstract

High commodity prices have increased interest in the impacts of federal ethanol policies. We present a stochastic, short-run structural model of U.S. corn, ethanol, and gasoline markets to estimate the price and welfare impacts of alternative policies on producers and consumers of corn, ethanol, and gasoline. The three federal policies that we consider are the Renewable Fuels Standard, the blenders tax credit, and the tariff on imported ethanol. Our model examines the impact of these policies on prices during the 2008/09 marketing year. Our results show that in the short run, a change in U.S. ethanol policies would not have a large, immediate impact on corn prices. Eliminating any one of the policies would reduce average corn prices by less than 4%. Removal of all three programs would decrease average corn prices by 14.5%. The reason why the changes are relatively modest is that existing U.S. ethanol plants will only shut down if their variable cost of production is not covered. Changes in ethanol policies would have large distributional impacts. Corn growers, ethanol producers, and fuel consumers have a large incentive to maintain high ethanol consumption. Gasoline producers have a large incentive to reduce ethanol production and imports. Livestock producers have a large short-run incentive to reduce domestic ethanol production.

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Bibliographic 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-wp468.

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Date of creation: Jun 2008
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Handle: RePEc:ias:cpaper:08-wp468

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Keywords: ethanol policy; stochastic equilibrium model; welfare analysis.;

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References

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  1. Sergio H. Lence & Dermot J. Hayes, 2002. "U.S. Farm Policy and the Volatility of Commodity Prices and Farm Revenues," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(2), pages 335-351.
  2. Kevin McNew & Bruce Gardner, 1999. "Income Taxes and Price Variability in Storable Commodity Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(3), pages 544-552.
  3. Babcock, Bruce A., 2008. "Distributional Implications of U.S. Ethanol Policy," Staff General Research Papers 12936, Iowa State University, Department of Economics.
  4. Amani Elobeid & Simla Tokgoz & Dermot J. Hayes & Bruce A. Babcock & Chad E. Hart, 2006. "Long-Run Impact of Corn-Based Ethanol on the Grain, Oilseed, and Livestock Sectors: A Preliminary Assessment, The," Food and Agricultural Policy Research Institute (FAPRI) Publications 06-bp49, Food and Agricultural Policy Research Institute (FAPRI) at Iowa State University.
  5. Ray, Daryll E. & Richardson, James W. & Torre Ugarte, Daniel de la & Tiller, Kelly, 1998. "Estimating Price Variability In Agriculture: Implications For Decision Makers," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 30(01), July.
  6. Lihong Lu McPhail & Bruce A. Babcock, 2008. "Ethanol, Mandates, and Drought: Insights from a Stochastic Equilibrium Model of the U.S. Corn Market," Center for Agricultural and Rural Development (CARD) Publications 08-wp464, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  7. Beghin, John C. & Dong, Fengxia & Elobeid, Amani & Fabiosa, Jacinto F. & Fuller, Frank H. & Hart, Chad E. & Kovarik, Karen P. & Tokgoz, Simla & Yu, Tun-Hsiang & Wailes, Eric J. & Chavez, Edward & Woma, 2007. "FAPRI 2007 U.S. And World Agricultural Outlook," Staff General Research Papers 12805, Iowa State University, Department of Economics.
    • Beghin, John C. & Dong, Fengxia & Elobeid, Amani E. & Fabiosa, Jacinto F. & Fuller, Frank H. & Hart, Chad E. & Kovarik, Karen & Tokgoz, Simla & Yu, Tun-Hsiang (Edward) & Wailes, Eric J. & Chavez, Eddi, 2007. "FAPRI 2007 U.S. and World Agricultural Outlook," Staff Reports 7296, Food and Agricultural Policy Research Institute (FAPRI).
  8. de Gorter, Harry & Just, David R., 2007. "The Welfare Economics of an Excise-Tax Exemption for Biofuels," MPRA Paper 5151, University Library of Munich, Germany, revised Sep 2007.
  9. de Gorter, Harry & Just, David R., 2007. "The Economics of U.S. Ethanol Import Tariffs with a Consumption Mandate and Tax Credit," Working Papers 127023, Cornell University, Department of Applied Economics and Management.
  10. Schmitz Andrew & Moss Charles B. & Schmitz Troy G., 2007. "Ethanol: No Free Lunch," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 5(2), pages 1-28, December.
  11. Mindy L. Baker & Dermot J. Hayes & Bruce A. Babcock, 2008. "Crop-Based Biofuel Production under Acreage Constraints and Uncertainty," Center for Agricultural and Rural Development (CARD) Publications 08-wp460, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  12. Olga Isengildina-Massa & Scott H. Irwin & Darrel L. Good & Jennifer K. Gomez, 2008. "Impact of WASDE reports on implied volatility in corn and soybean markets," Agribusiness, John Wiley & Sons, Ltd., vol. 24(4), pages 473-490.
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Citations

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Cited by:
  1. Maxwell, Christian & Davison, Matt, 2014. "Using real option analysis to quantify ethanol policy impact on the firm's entry into and optimal operation of corn ethanol facilities," Energy Economics, Elsevier, vol. 42(C), pages 140-151.
  2. Nora Lustig, 2009. "Coping with Rising Food Prices: Policy Dilemmas in the Developing World," Working Papers id:2241, eSocialSciences.
  3. Tyner, Wallace E. & Taheripour, Farzad & Perkis, David, 2010. "Comparison of fixed versus variable biofuels incentives," Energy Policy, Elsevier, vol. 38(10), pages 5530-5540, October.
  4. McPhail, Lihong Lu, 2011. "Assessing the impact of US ethanol on fossil fuel markets: A structural VAR approach," Energy Economics, Elsevier, vol. 33(6), pages 1177-1185.
  5. Schmit, Todd M. & Luo, Jianchuan & Conrad, Jon M., 2010. "Estimating the Influence of Ethanol Policy on Plant Investment Decisions: A Real Options Analysis with Two Stochastic Variables," Working Papers 126963, Cornell University, Department of Applied Economics and Management.
  6. Jin, Zhong & Teahan, Brittany, 2009. "Iowa’s Tax Incentive Programs Used by Biofuel Producers Tax Credits Program Evaluation Study," MPRA Paper 14795, University Library of Munich, Germany.

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