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The Theory of Biofuel Policy and Food Grain Prices


  • Drabik, Dusan


We develop an analytical framework to assess the market effects of alternative biofuel policies (including subsidies to feedstocks). U.S. corn-ethanol policies are used as an example to study the effects on corn prices. We determine the ‘no policy’ ethanol price; analyze the implications for the ‘no policy’ corn price and resulting ‘water’ in the ethanol price premium due to policy; and generalize the unique interaction effects between mandates and tax credits to include ethanol and corn production subsidies. The effect of an ethanol price premium depends on the value of the ethanol by-product, the value of production subsidies, and where the world ethanol price is determined. U.S. corn-ethanol policies are a major reason for the increases in corn prices – an estimated increase of 26 – 45% in the period 2008 – 2011.

Suggested Citation

  • Drabik, Dusan, 2011. "The Theory of Biofuel Policy and Food Grain Prices," Working Papers 126615, Cornell University, Department of Applied Economics and Management.
  • Handle: RePEc:ags:cudawp:126615

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    References listed on IDEAS

    1. Stephen P. Holland & Jonathan E. Hughes & Christopher R. Knittel & Nathan C. Parker, 2015. "Some Inconvenient Truths about Climate Change Policy: The Distributional Impacts of Transportation Policies," The Review of Economics and Statistics, MIT Press, vol. 97(5), pages 1052-1069, December.
    2. Drabik, Dusan & de Gorter, Harry & Just, David R., 2010. "The Implications of Alternative Biofuel Policies on Carbon Leakage," 2011 Annual Meeting, July 24-26, 2011, Pittsburgh, Pennsylvania 102689, Agricultural and Applied Economics Association.
    3. Jingbo Cui & Harvey Lapan & GianCarlo Moschini & Joseph Cooper, 2011. "Welfare Impacts of Alternative Biofuel and Energy Policies," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 93(5), pages 1235-1256.
    4. Harry de Gorter & David R. Just, 2008. "The Economics of a Blend Mandate for Biofuels," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(3), pages 738-750.
    5. Mallory, Mindy L. & Irwin, Scott H. & Hayes, Dermot J., 2012. "How market efficiency and the theory of storage link corn and ethanol markets," Energy Economics, Elsevier, vol. 34(6), pages 2157-2166.
    6. Headey, Derek & Fan, Shenggen, 2010. "Reflections on the global food crisis: How did it happen? How has it hurt? And how can we prevent the next one?," Research reports 165, International Food Policy Research Institute (IFPRI).
    7. Brian D. Wright, 2011. "The Economics of Grain Price Volatility," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 33(1), pages 32-58.
    8. Hochman, Gal & Rajagopal, Deepak & Timilsina, Govinda & Zilberman, David, 2011. "The role of inventory adjustments in quantifying factors causing food price inflation," Policy Research Working Paper Series 5744, The World Bank.
    9. Harry de Gorter & David R. Just, 2007. "The Welfare Economics of a Biofuel Tax Credit and the Interaction Effects with Price Contingent Farm Subsidies," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(2), pages 477-488.
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    Cited by:

    1. Pinstrup-Andersen, Per (ed.), 2016. "Food Price Policy in an Era of Market Instability: A Political Economy Analysis," OUP Catalogue, Oxford University Press, number 9780198788836, June.
    2. Christopher R. Knittel and Aaron Smith, 2015. "Ethanol Production and Gasoline Prices: A Spurious Correlation," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1).
    3. Kristoufek, Ladislav & Janda, Karel & Zilberman, David, 2012. "Correlations between biofuels and related commodities before and during the food crisis: A taxonomy perspective," Energy Economics, Elsevier, vol. 34(5), pages 1380-1391.
    4. Dusan Drabik & Pavel Ciaian & Jan Pokrivcak, 2014. "Biofuels and Vertical Price Transmission: The Case of the U.S. Corn, Ethanol, and Food Markets," LICOS Discussion Papers 35114, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
    5. Cooper, Kristen & de Gorter, Harry & Drabik, Dusan, 2012. "Welfare Effects of Biofuel Policies in the Presence of Fuel and Labor Taxes," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124763, Agricultural and Applied Economics Association.
    6. Drabik, Dušan & de Gorter, Harry, 2013. "Emissions from Indirect Land Use Change: Do they Matter with Fuel Market Leakages?," Review of Agricultural and Applied Economics (RAAE), Faculty of Economics and Management, Slovak Agricultural University in Nitra Provider-Homepage:;Association of Agricultural Economists in Slovakia (APES), vol. 16(2).
    7. Hakan Eggert & Mads Greaker, 2014. "Promoting Second Generation Biofuels: Does the First Generation Pave the Road?," Energies, MDPI, Open Access Journal, vol. 7(7), pages 1-16, July.
    8. de Gorter, Harry & Rausser, Gordon C., 2013. "US Policy Contributions to Agricultural Commodity Price Fluctuations, 2006-12," WIDER Working Paper Series 033, World Institute for Development Economic Research (UNU-WIDER).
    9. Drabik, Dusan & de Gorter, Harry & Timilsina, Govinda R., 2014. "The effect of biodiesel policies on world biodiesel and oilseed prices," Energy Economics, Elsevier, vol. 44(C), pages 80-88.
    10. de Gorter, Harry & Drabik, Dusan & Kliauga, Erika M. & Timilsina, Govinda R., 2013. "An economic model of Brazil's ethanol-sugar markets and impacts of fuel policies," Policy Research Working Paper Series 6524, The World Bank.
    11. de Gorter, Harry & Drabik, Dusan & Timilsina, Govinda R., 2013. "Should Zambia produce biodiesel from soybeans ? some insights from an empirical analysis," Policy Research Working Paper Series 6498, The World Bank.
    12. de Gorter, Harry & Drabik, Dusan, 2015. "Developing Countries' Policy Responses to Food Price Boom and Biofuel Policies," 2015 Conference, August 9-14, 2015, Milan, Italy 211564, International Association of Agricultural Economists.

    More about this item


    biofuel policies; corn prices; tax credit; mandate; ethanol subsidy; corn subsidy; water; price premium; Agricultural and Food Policy; Production Economics; Resource /Energy Economics and Policy; Q02; Q18; Q19;

    JEL classification:

    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market
    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy
    • Q19 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Other


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