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Crop-Based Biofuel Production under Acreage Constraints and Uncertainty

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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Paper provided by Center for Agricultural and Rural Development (CARD) at Iowa State University in its series Center for Agricultural and Rural Development (CARD) Publications with number 08-wp460.

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Date of creation: Feb 2008
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Handle: RePEc:ias:cpaper:08-wp460
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  1. Shapouri, Hosein & Duffield, James A. & Graboski, Michael S., 1995. "Estimating the Net Energy Balance of Corn Ethanol," Agricultural Economics Reports 34005, United States Department of Agriculture, Economic Research Service.
  2. 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, 03.
  3. Miranowski, John & Tegene, Abebayehu & Huffman, Wallace, 1988. "Dynamic Corn Supply Functions: A Model with Explicit Optimization," Staff General Research Papers 10699, Iowa State University, Department of Economics.
  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. Eckstein, Zvi, 1984. "A Rational Expectations Model of Agricultural Supply," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 1-19, February.
  6. 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," Food and Agricultural Policy Research Institute (FAPRI) Publications 06-bp49, Food and Agricultural Policy Research Institute (FAPRI) at Iowa State University.
  7. Miranowski, John & Orazem, Peter, 1994. "A Dynamic Model of Acreage Allocation with General and Crop-Specific Capital," Staff General Research Papers 10695, Iowa State University, Department of Economics.
  8. Satheesh V. Aradhyula & Matthew T. Holt, 1988. "Risk Behavior and Rational Expectations in the U.S. Broiler Market," Food and Agricultural Policy Research Institute (FAPRI) Publications 88-wp33, Food and Agricultural Policy Research Institute (FAPRI) at Iowa State University.
  9. Nick D. Paulson & Roger G. Ginder, 2007. "Growth and Direction of the Biodiesel Industry in the United States, The," Center for Agricultural and Rural Development (CARD) Publications 07-wp448, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  10. Rozakis, S. & Sourie, J. -C., 2005. "Micro-economic modelling of biofuel system in France to determine tax exemption policy under uncertainty," Energy Policy, Elsevier, vol. 33(2), pages 171-182, January.
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