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Biofuels: Potential Production Capacity, Effects on Grain and Livestock Sectors, and Implications for Food Prices and Consumers

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  • Hayes, Dermot J.
  • Babcock, Bruce A.
  • Fabiosa, Jacinto F.
  • Tokgoz, Simla
  • Elobeid, Amani E.
  • Yu, Tun-Hsiang (Edward)
  • Dong, Fengxia
  • Hart, Chad E.
  • Chavez, Eddie C.
  • Pan, Suwen
  • Carriquiry, Miguel A.
  • Dumortier, Jerome

Abstract

We examined four evolution paths of the biofuel sector using a partial equilibrium world agricultural sector model in CARD that includes the new RFS in the 2007 EISA, a two-way relationship between fossil energy and biofuel markets, and a new trend toward corn oil extraction in ethanol plants. At one extreme, one scenario eliminates all support to the biofuel sector when the energy price is low, while the other extreme assumes no distribution bottleneck in ethanol demand growth when the energy price is high. The third scenario considers a pure market force driving ethanol demand growth because of the high energy price, while the last is a policy-induced shock with removal of the biofuel tax credit when the energy price is high. Standard results hold where the biofuel sector expands with higher energy price, raising the prices of most agricultural commodities through demand side adjustment channels for primary feedstocks and supply side adjustment channels for substitute crops and livestock. On the other hand, the biofuel sector shrinks coupled with opposite impacts on agricultural commodities with the removal of all support including the tax credit. Also, we find that given distribution bottlenecks, cellulosic ethanol crowds marketing channels resulting in a corn-based ethanol price that is discounted. The blenders’ credit and consumption mandates provide a price floor for ethanol and for corn. Finally, the tight linkage between the energy and agricultural sectors resulting from the expanding biofuel sector may raise the possibility of spillover effects of OPEC’s market power on the agricultural sector.

Suggested Citation

  • Hayes, Dermot J. & Babcock, Bruce A. & Fabiosa, Jacinto F. & Tokgoz, Simla & Elobeid, Amani E. & Yu, Tun-Hsiang (Edward) & Dong, Fengxia & Hart, Chad E. & Chavez, Eddie C. & Pan, Suwen & Carriquiry, M, 2009. "Biofuels: Potential Production Capacity, Effects on Grain and Livestock Sectors, and Implications for Food Prices and Consumers," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 41(02), August.
  • Handle: RePEc:ags:joaaec:53093
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    1. Westhoff, Patrick C. & Thompson, Wyatt & Meyer, Seth D., 2008. "Biofuels: Impact of Selected Farm Bill Provisions and other Biofuel Policy Options," FAPRI-MU Report Series 37772, Food and Agricultural Policy Research Institute at University of Missouri.
    2. 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," Center for Agricultural and Rural Development (CARD) Publications 06-bp49, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    3. Du, Xiaodong & Hayes, Dermot J., 2009. "The impact of ethanol production on US and regional gasoline markets," Energy Policy, Elsevier, vol. 37(8), pages 3227-3234, August.
    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," Food and Agricultural Policy Research Institute (FAPRI) Publications 07-sr101, Food and Agricultural Policy Research Institute (FAPRI) at Iowa State University.
    5. Thompson, Wyatt & Meyer, Seth D. & Westhoff, Patrick C., 2008. "Model of the US Ethanol Market," FAPRI-MU Report Series 37971, Food and Agricultural Policy Research Institute at University of Missouri.
    6. Simla Tokgoz & Amani Elobeid & Jacinto Fabiosa & Dermot J. Hayes & Bruce A. Babcock & Tun-Hsiang (Edward) Yu & Fengxia Dong & Chad E. Hart, 2008. "Bottlenecks, Drought, and Oil Price Spikes: Impact on U.S. Ethanol and Agricultural Sectors," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 30(4), pages 604-622.
    7. Kalaitzandonakes, Nicholas G. & Kaufman, James & Meyer, Seth D. & Thompson, Wyatt, 2008. "The Impact of Biotech Corn Traits on Ethanol Production," Environmental and Rural Development Impacts Conference, October 15-16, 2008, St. Louis, Missouri 53499, Farm Foundation, Transition to a Bio Economy Conferences.
    8. Searchinger, Timothy & Heimlich, Ralph & Houghton, R. A. & Dong, Fengxia & Elobeid, Amani & Fabiosa, Jacinto F. & Tokgoz, Simla & Hayes, Dermot J. & Yu, Hun-Hsiang, 2008. "Use of U.S. Croplands for Biofuels Increases Greenhouse Gases Through Emissions from Land-Use Change," Staff General Research Papers Archive 12881, Iowa State University, Department of Economics.
    9. Du, Xiaodong & Hayes, Dermot J., 2008. "Impact of Ethanol Production on U.S. and Regional Gasoline Prices and On the Profitability of U.S. Oil Refinery Industry," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6353, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
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    Cited by:

    1. Huang, Jikun & Yang, Jun & Msangi, Siwa & Rozelle, Scott & Weersink, Alfons, 2012. "Biofuels and the poor: Global impact pathways of biofuels on agricultural markets," Food Policy, Elsevier, vol. 37(4), pages 439-451.
    2. Ciaian, Pavel & Kancs, d'Artis, 2011. "Food, energy and environment: Is bioenergy the missing link?," Food Policy, Elsevier, vol. 36(5), pages 571-580, October.
    3. Moschini, GianCarlo & Cui, Jingbo & Lapan, Harvey E., 0. "Economics of Biofuels: An Overview of Policies, Impacts and Prospects," Bio-based and Applied Economics Journal, Italian Association of Agricultural and Applied Economics (AIEAA), issue 3.
    4. Condon, Nicole & Klemick, Heather & Wolverton, Ann, 2015. "Impacts of ethanol policy on corn prices: A review and meta-analysis of recent evidence," Food Policy, Elsevier, vol. 51(C), pages 63-73.
    5. Catherine L. Kling & Raymond W. Arritt & Gray Calhoun & David A. Keiser & et al., 2016. "Research Needs and Challenges in the FEW System: Coupling Economic Models with Agronomic, Hydrologic, and Bioenergy Models for Sustainable Food, Energy, and Water Systems," Center for Agricultural and Rural Development (CARD) Publications 16-wp563, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    6. Wetzstein, Michael E., 2010. "Should We Invest in Biofuels?," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 42(03), August.
    7. James M. Griffin, 2013. "U.S. Ethanol Policy: Time to Reconsider?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4).
    8. Bouët, Antoine & Dimaranan, Betina V. & Valin, Hugo, 2010. "Modeling the global trade and environmental impacts of biofuel policies," IFPRI discussion papers 1018, International Food Policy Research Institute (IFPRI).
    9. Wetzstein, M. & Wetzstein, H., 2011. "Four myths surrounding U.S. biofuels," Energy Policy, Elsevier, vol. 39(7), pages 4308-4312, July.
    10. Rebecca S. Dodder & Amani Elobeid & Timothy L. Johnson & P. Ozge Kaplan & Lyubov A. Kurkalova & Silvia Secchi & Simla Tokgoz, 2011. "Environmental Impacts of Emerging Biomass Feedstock Markets: Energy, Agriculture, and the Farmer," Center for Agricultural and Rural Development (CARD) Publications 11-wp526, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    11. Cansino, JM & Cardenete, MA & González-Limón, JM & Román, R, 2013. "Economic impacts of biofuels deployment in Andalusia," Renewable and Sustainable Energy Reviews, Elsevier, vol. 27(C), pages 274-282.
    12. Paudel, Krishna P. & Timilsina, Govinda R., 2010. "Would There Be Surplus Grains for Biofuels? An Assessment of Agro-economic Factors and Biofuel Production Potential at the Global Level," Staff Papers 113125, Louisiana State University, Department of Agricultural Economics and Agribusiness.
    13. Okwo, Adaora & Thomas, Valerie M., 2014. "Biomass feedstock contracts: Role of land quality and yield variability in near term feasibility," Energy Economics, Elsevier, vol. 42(C), pages 67-80.
    14. Ciaian, Pavel & Kancs, d'Artis, 2011. "Interdependencies in the energy-bioenergy-food price systems: A cointegration analysis," Resource and Energy Economics, Elsevier, vol. 33(1), pages 326-348, January.
    15. Carvalho, Carvalho R. & Richardson, James W. & Bryant, Henry L., 2015. "The impact of biofuel policies on the Brazilian dairy sector," 2015 Annual Meeting, January 31-February 3, 2015, Atlanta, Georgia 196787, Southern Agricultural Economics Association.
    16. repec:eee:rensus:v:81:y:2018:i:p2:p:3159-3177 is not listed on IDEAS
    17. repec:eee:eneeco:v:65:y:2017:i:c:p:148-160 is not listed on IDEAS

    More about this item

    Keywords

    biofuel; EISA; ethanol; tax credit; world agricultural sector model; Agribusiness; Consumer/Household Economics; Crop Production/Industries; Demand and Price Analysis; International Relations/Trade; Livestock Production/Industries; Political Economy; Production Economics; Resource /Energy Economics and Policy; Q13; Q18; Q38;

    JEL classification:

    • Q13 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Markets and Marketing; Cooperatives; Agribusiness
    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy
    • Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)

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