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Crop-Based Biofuel Production under Acreage Constraints and Uncertainty

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Abstract

A myriad of policy issues and questions revolve around understanding the bioeconomy. To gain insight, we develop a stochastic and dynamic general equilibrium model and capture the uncertain nature of key variables such as crude oil prices and commodity yields. We also incorporate acreage limitations on key feedstocks such as corn, soybeans, and switchgrass. We make standard assumptions that investors are rational and engage in biofuel production only if returns exceed what they can expect to earn from alternative investments. The Energy Independence and Security Act of 2007 mandates the use of 36 billion gallons of biofuels by 2022, with significant requirements for cellulosic biofuel and biodiesel production. We calculate the level of tax credits required to stimulate this level of production. Subsidies of nearly $2.50 per gallon to biodiesel and $1.86 per gallon to cellulosic biofuel were required, and long-run equilibrium commodity prices were high, with corn at $4.76 per bushel and soybeans at $13.01 per bushel. High commodity prices are due to intense competition for planted acres among the commodities.

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  • Mindy L. Baker & Dermot J. Hayes & Bruce A. Babcock, 2008. "Crop-Based Biofuel Production under Acreage Constraints and Uncertainty," Center for Agricultural and Rural Development (CARD) Publications 08-wp460, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  • Handle: RePEc:ias:cpaper:08-wp460
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    3. 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.
    4. J. Wu & R. M. Adams, 2001. "Production Risk, Acreage Decisions and Implications for Revenue Insurance Programs," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 49(1), pages 19-35, March.
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    Cited by:

    1. Baker, Mindy Lyn, 2009. "Three essays concerning agriculture and energy," ISU General Staff Papers 200901010800001849, Iowa State University, Department of Economics.
    2. Peters, May & Somwaru, Agapi & Hansen, James M. & Seeley, Ralph & Dirkse, Steve, 2009. "Modeling Biofuels Expansion in a Changing Global Environment," 2009 Conference, August 16-22, 2009, Beijing, China 51732, International Association of Agricultural Economists.
    3. Zuniga Gonzalez, Carlos Alberto, 2012. "Total factor productivity and Bio Economy effects," MPRA Paper 49355, University Library of Munich, Germany, revised 13 Nov 2012.
    4. Kemp-Benedict, Eric, 2012. "The national bioenergy investment model: Technical documentation," MPRA Paper 37835, University Library of Munich, Germany.
    5. Lihong Lu McPhail & Bruce A. Babcock, 2008. "Short-Run Price and Welfare Impacts of Federal Ethanol Policies," Center for Agricultural and Rural Development (CARD) Publications 08-wp468, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    6. Rosburg, Alicia Sue, 2012. "Essays concerning the cellulosic biofuel industry," ISU General Staff Papers 201201010800003732, Iowa State University, Department of Economics.
    7. Makena COFFMAN, "undated". "An Assessment of Bioenergy in an Island Economy," EcoMod2009 21500023, EcoMod.

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    Keywords

    biodiesel; biofuels; cellulosic; dynamic; ethanol; general equilibrium Monte Carlo; market.;

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