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Short-Run Price and Welfare Impacts of Federal Ethanol Policies

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Author Info
Lihong Lu McPhail ()
Bruce A. Babcock () (Center for Agricultural and Rural Development (CARD), Midwest Agribusiness Trade Research and Information Center (MATRIC))

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

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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. Ariadna Martinez-Gonzalez & Ian M. Sheldon & Stanley Thompson, 2007. "Estimating the Welfare Effects of U.S. Distortions in the Ethanol Market Using a Partial Equilibrium Trade Model," Journal of Agricultural & Food Industrial Organization, Berkeley Electronic Press, vol. 5(2). [Downloadable!]
  2. Barrett, Chad & Kaus, Phil & Smith, Darnell & Hayes, Dermot J. & Babcock, Bruce A. & Meyers, William H., 1999. "Iowa Ag Review," Staff General Research Papers 1414, Iowa State University, Department of Economics.
    Other versions:
    • Elmore, Steven L. & Smith, Darnell B. & Meyers, William H. & Hart, Chad & Babcock, Bruce A. & Lawrence, John D., 1996. "Iowa Ag Review," Staff General Research Papers 1027, Iowa State University, Department of Economics.
    • Babcock, Bruce A. & Beghin, John C. & Clarke, Sandra & Heffernan, Keith & Hempe, Betty & Kaus, Phillip & Olson, Becky, 2001. "Iowa Ag Review," Staff General Research Papers 1940, Iowa State University, Department of Economics.
    • Babcock, Bruce A. & Beghin, John & Thomas, Katie & Heffernan, Keith & Olson, Becky & Kaus, Phillip, 2000. "Iowa Ag Review," Staff General Research Papers 1819, Iowa State University, Department of Economics.
    • Mohanty, Samarendu & Hayes, Dermot J. & Clemens, Roxanne & Meyers, William H. & Smith, Darnell B. & Elmore, Steven L. & Rude, James & Baumel, C. Phillip & Fabiosa, Jacinto & Fuller, Frank H., 1997. "Iowa Ag Review," Staff General Research Papers 1069, Iowa State University, Department of Economics.
    • Babcock, Bruce A. & Beghin, John & Clarke, Sandra & Heffernan, Keith & Hart, Chad & Hempe, Betty & Olson, Becky, 2001. "Iowa Ag Review," Staff General Research Papers 2017, Iowa State University, Department of Economics.
    • Babcock, Bruce A. & Beghin, John & Thomas, Katie & Heffernan, Keith & Olson, Becky & Kaus, Phillip, 1999. "Iowa Ag Review," Staff General Research Papers 1560, Iowa State University, Department of Economics.
    • Babcock, Bruce A. & Beghin, John & Clarke, Sandra & Heffernan, Keith & Hempe, Betty & Hart, Chad & Olson, Becky, 2001. "Iowa Ag Review," Staff General Research Papers 1997, Iowa State University, Department of Economics.
    • Lawrence, John D. & Meyer, Seth D. & Kruse, John R. & Hayes, Dermot J. & Babcock, Bruce A. & Hennessy, David & Smith, Darnell B. & Meyers, William H., 1995. "Iowa Ag Review," Staff General Research Papers 864, Iowa State University, Department of Economics.
    • Babcock, Bruce A. & Beghin, John & Clarke, Sandra & Heffernan, Keith & Hempe, Betty & Olson, Becky, 2002. "Iowa Ag Review," Staff General Research Papers 2052, Iowa State University, Department of Economics.
    • Babcock, Bruce A. & Beghin, John & Clarke, Sandra & Heffernan, Keith & Hempe, Betty & Clemens, Roxanne & Olson, Becky, 2002. "Iowa Ag Review," Staff General Research Papers 2092, Iowa State University, Department of Economics.
    • Babcock, Bruce A. & Chaherli, Nabil M. & Lakshminarayan, P. G. & Smith, Darnell B. & Elmore, Steven L. & Pautsch, Greg & Meyers, William H. & Hart, Chad, 1999. "Iowa Ag Review," Staff General Research Papers 1527, Iowa State University, Department of Economics.
    • Babcock, Bruce A. & Beghin, John & Thomas, Katie & Heffernan, Keith & Olson, Becky & Kaus, Phillip, 2000. "Iowa Ag Review," Staff General Research Papers 1778, Iowa State University, Department of Economics.
    • Babcock, Bruce A. & Beghin, John & Thomas, Katie & Heffernan, Keith & Olson, Becky & Kaus, Phillip, 1999. "Iowa Ag Review," Staff General Research Papers 1667, Iowa State University, Department of Economics.
    • Babcock, Bruce A. & Beghin, John & Heffernan, Keith & Kaus, Phillip & Pim, Judith & Hempe, Betty & Pyle, Janis & Olson, Becky, 2000. "Iowa Ag Review," Staff General Research Papers 1859, Iowa State University, Department of Economics.
    • Babcock, Bruce A. & Beghin, John & Heffernan, Keith & Kaus, Phillip & Thomas, Katie & Olson, Becky, 2000. "Iowa Ag Review," Staff General Research Papers 1713, Iowa State University, Department of Economics.
    • Babcock, Bruce A. & Beghin, John & Heffernan, Keith & Hempe, Betty & Chimenti, Linda & Olson, Becky & Kaus, Phillip, 2000. "Iowa Ag Review," Staff General Research Papers 1900, Iowa State University, Department of Economics.
    • Babcock, Bruce A. & Clarke, Sandra & Hempe, Betty & Olson, Becky & Beghin, John & Heffernan, Keith & Hart, Chad, 2001. "Iowa Ag Review," Staff General Research Papers 1983, Iowa State University, Department of Economics.
    • Smith, Darnell B. & Meyers, William H. & Meyer, Seth D. & Hayes, Dermot J., 1999. "Iowa Ag Review," Staff General Research Papers 1528, Iowa State University, Department of Economics.
  3. Bruce Gardner, 2007. "Fuel Ethanol Subsidies and Farm Price Support," Journal of Agricultural & Food Industrial Organization, Berkeley Electronic Press, vol. 5(2). [Downloadable!]
  4. Babcock, Bruce A., 2008. "Distributional Implications of U.S. Ethanol Policy," Staff General Research Papers 12936, Iowa State University, Department of Economics. [Downloadable!]
    Other versions:
  5. Andrew Schmitz & Charles B. Moss & Troy G. Schmitz, 2007. "Ethanol: No Free Lunch," Journal of Agricultural & Food Industrial Organization, Berkeley Electronic Press, vol. 5(2). [Downloadable!]
  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. [Downloadable!]
    Other versions:
  7. Elobeid, Amani & Tokgoz, Simla & Hayes, Dermot J. & Babcock, Bruce A. & Hart, Chad E., 2006. "Long-Run Impact of Corn-Based Ethanol on the Grain, Oilseed, and Livestock Sectors: A Preliminary Assessment, The," Staff General Research Papers 12692, Iowa State University, Department of Economics. [Downloadable!]
    Other versions:
  8. 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!]
    Other versions:
  9. Lence, Sergio H & Hayes, Dermot J, 2002. " U.S. Farm Policy and the Volatility of Commodity Prices and Farm Revenues," American Journal of Agricultural Economics, American Agricultural Economics Association, vol. 84(2), pages 335-51, May. [Downloadable!] (restricted)
    Other versions:
  10. Beghin, John C. & Dong, Fengxia & Elobeid, Amani & Fabiosa, Jacinto F. & Fuller, Frank H. & Hart, Chad E. & Kovarik, Karen P. & Tokgoz, Simla & Yu, Tun-Hsiang (Edward) & Wailes, Eric & Chavez, Ed & Wo, 2007. "FAPRI 2007 U.S. and World Agricultural Outlook," Staff General Research Papers 12805, Iowa State University, Department of Economics. [Downloadable!]
    Other versions:
  11. Amani Elobeid & Simla Tokgoz, 2008. "Removing Distortions in the U.S. Ethanol Market: What Does It Imply for the United States and Brazil?," American Journal of Agricultural Economics, American Agricultural Economics Association, vol. 90(4), pages 918-932, November. [Downloadable!] (restricted)
    Other versions:
  12. Ray, Daryll E. & Richardson, James W. & Ugarte, Daniel G. De La Torre & Tiller, Kelly H., 1998. "Estimating Price Variability In Agriculture: Implications For Decision Makers," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 30(01), July. [Downloadable!]
  13. repec:jaa:jagape:v:30:y:1998:i:1:p:21-33 is not listed on IDEAS
  14. Baker, Mindy & Hayes, Dermot J. & Babcock, Bruce A., 2008. "Crop-Based Biofuel Production under Acreage Constraints and Uncertainty," Staff General Research Papers 12870, Iowa State University, Department of Economics. [Downloadable!]
    Other versions:
Full references

Cited by:
(explanations, 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. 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. [Downloadable!]
  2. Mindy L. Baker, 2008. "Welfare Changes from the U.S. Ethanol Tax Credit: The Role of Uncertainty and Interlinked Commodity Markets," Center for Agricultural and Rural Development (CARD) Publications 08-wp483, Center for Agricultural and Rural Development (CARD) at Iowa State University. [Downloadable!]
    Other versions:
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