IDEAS home Printed from https://ideas.repec.org/p/ags/aaea10/60857.html
   My bibliography  Save this paper

Commodity Price Volatility in the Biofuel Era: An Examination of the Linkage between Energy and Agricultural Markets

Author

Listed:
  • Hertel, Thomas W.
  • Beckman, Jayson F.

Abstract

Agricultural and energy commodity prices have traditionally exhibited relatively low – even negative correlation. However, the recent increases in biofuel production have altered the agriculture-energy relationship in a fundamental way. The amount of corn utilized for ethanol production in the US has increased from 5% in 2001 to over one-third by the end of the decade. This increase has drawn corn previously sold to other uses (exports, food, feed), as well as acreage devoted to other crops (e.g., oilseeds and other grains). In addition, there has been an increase in the demand for production inputs, especially fertilizers, which are heavily energy-intensive. In short, the previous “biofuel decade” has led to significant changes in the US, and indeed the global economy. In the next five years, the U.S. Renewable Fuels Standard (RFS) envisions a further boost of ethanol production to 15 billion gallons per year. This might be expected to further strengthen the linkage between energy prices and agricultural commodity markets. However, unless oil prices rise sharply, it is likely that the RFS will be binding in 2015 – that is, the amount of ethanol consumed will be determined by government mandates rather than by the relative price of oil vs. corn-based ethanol. Under such a scenario, with an even larger share of corn production going to ethanol, and with that source of demand potentially becoming unresponsive to price, there is potential for significant increases in commodity market volatility. Indeed, we estimate that, in the presence of a binding RFS, the inherent volatility in the US coarse grains market will rise by about one-quarter. And the volatility of the US coarse grains price to supply side shocks in that market will rise by nearly one-half. Under a high oil price scenario, we expect that, rather than the RFS binding, the binding constraint is likely to be the “blend wall”, i.e. the legal % content of ethanol in gasoline used by regular automobiles. (This is currently set at 10%.) With a binding blend wall, we see similar, although somewhat smaller, increases in market volatility. If both the RFS and the blend wall are simultaneously binding, then US coarse grains price volatility in response to corn supply shocks is 57% higher than in the non-binding case, and world price volatility is boosted by 25%. In short, we envision a future in which agricultural price volatility – particularly for biofuel feedstocks – will depend critically on renewable energy policies. Indeed, these may dominate the traditional importance of agricultural commodity policies in many markets.

Suggested Citation

  • Hertel, Thomas W. & Beckman, Jayson F., 2010. "Commodity Price Volatility in the Biofuel Era: An Examination of the Linkage between Energy and Agricultural Markets," 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado 60857, Agricultural and Applied Economics Association.
  • Handle: RePEc:ags:aaea10:60857
    as

    Download full text from publisher

    File URL: http://purl.umn.edu/60857
    Download Restriction: no

    Other versions of this item:

    More about this item

    Keywords

    Resource /Energy Economics and Policy;

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • Q1 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ags:aaea10:60857. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search). General contact details of provider: http://edirc.repec.org/data/aaeaaea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.