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Identifying Supply and Demand Elasticities of Agricultural Commodities: Implications for the US Ethanol Mandate

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  • Michael J. Roberts
  • Wolfram Schlenker

Abstract

We present a new framework to identify demand and supply elasticities of agricultural commodities using yield shocks - deviations from a time trend of output per area, which are predominantly caused by weather fluctuations. Demand is identified using current-period shocks that give rise to exogenous shifts in supply. Supply is identified using past shocks, which affect expected future prices through inventory accretion or depletion. We use our estimated elasticities to evaluate the impact of ethanol subsidies and mandates on world food commodity prices, quantities, and food consumers' surplus. The current US ethanol mandate requires that about 5 percent of world caloric production from corn, wheat, rice, and soybeans be used for ethanol generation. As a result, world food prices are predicted to increase by about 30 percent and global consumer surplus from food consumption is predicted to decrease by 155 billion dollars annually. If a third of the biofuel calories are recycled as feed stock for livestock, the predicted price increase scales back to 20 percent. While commodity demand is extremely inelastic, price response is muted by a significant supply response that is obscured if futures prices are not instrumented. The resulting expansion of agricultural growing area potentially offsets the CO2 emission benefits from biofuels.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15921.

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Date of creation: Apr 2010
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Handle: RePEc:nbr:nberwo:15921

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Cited by:
  1. 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.
  2. Nicolas Merener, 2012. "Globally Distributed Production and Asset Pricing:the Rise of Latin America in CME Soybean Futures," Business School Working Papers 2012-01, Universidad Torcuato Di Tella.
  3. Michael J. Roberts & Wolfram Schlenker, 2011. "Is Agricultural Production Becoming More or Less Sensitive to Extreme Heat? Evidence from US Corn and Soybean Yields," NBER Chapters, in: The Design and Implementation of US Climate Policy, pages 271-282 National Bureau of Economic Research, Inc.
  4. Ke Tang & Wei Xiong, 2010. "Index Investment and Financialization of Commodities," NBER Working Papers 16385, National Bureau of Economic Research, Inc.
  5. Steven T. Berry & Michael J. Roberts & Wolfram Schlenker, 2012. "Corn Production Shocks in 2012 and Beyond: Implications for Food Price Volatility," NBER Chapters, in: The Economics of Food Price Volatility National Bureau of Economic Research, Inc.
  6. Goodwin, Barry K. & Marra, Michele C. & Piggott, Nicholas E. & Mueller, Steffen, 2012. "Is Yield Endogenous to Price? An Empirical Evaluation of Inter- and Intra-Seasonal Corn Yield Response," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124884, Agricultural and Applied Economics Association.
  7. Tran, A. Nam & Welch, Jarrod R. & Lobell, David & Roberts, Michael J. & Schlenker, Wolfram, 2012. "Commodity Prices and Volatility in Response to Anticipated Climate Change," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124827, Agricultural and Applied Economics Association.
  8. Hendricks, Nathan P. & Smith, Aaron D., 2012. "Comparing the Bias of Dynamic Panel Estimators in Multilevel Panels: Individual versus Grouped Data," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124548, Agricultural and Applied Economics Association.
  9. Roberts, Michael J. & Tran, A. Nam, 2012. "Commodity Price Adjustment in a Competitive Storage Model with an Application to the US Biofuel Policies," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124869, Agricultural and Applied Economics Association.
  10. Timothy A. Wise, 2012. "The Cost to Mexico of U.S. Corn Ethanol Expansion," GDAE Working Papers 12-01, GDAE, Tufts University.

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