IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Biofuels, Binding Constraints and Agricultural Commodity Price Volatility

  • Philip Abbott
Registered author(s):

    The share of U.S. corn production used to produce ethanol increased from 12.4% in the 2004/05 crop year to over 38.5% in the 2010/11 crop year, and remained at that high level in 2011/12. Even after accounting for return of by-products to the feed market, this is a large and persistent new demand for corn that surely has changed price dynamics. Nevertheless, the role of biofuels in determining recent high corn and other agricultural commodity prices, as well as their volatility, remains controversial. Policy measures to encourage biofuels production, including the Renewable Fuels Standard (RFS) mandates, subsidies to ethanol blenders, regulations on gasoline chemistry and import tariffs, helped to create this new, persistent demand for corn and contributed to incentives to create the capacity to produce ethanol and to use corn for fuel rather than food. Various aspects of implementing that policy and the economics of ethanol plant operation suggest very inelastic industrial demand for corn, contributing to both higher prices and greater price volatility. But turbulence in recent economic events have caused the mechanisms through which biofuels demands influence corn and other agricultural commodity prices to vary over time in ways that are observable in data. Price volatility and "subsidy incidence" also depend on which regime is in place. Simple theory along with data on supply, use and pricing are used to identify when each regime matters as policy influenced constraints bound to varying degrees. Capacity constraints appear to have dominated in the short run, allowing rents to absorb differences in variations of corn prices versus energy prices. Apparent price volatility seems due to mechanism switching and to changing trends more so than to random short run shocks under inelastic demand.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.nber.org/papers/w18873.pdf
    Download Restriction: Access to the full text is generally limited to series subscribers, however if the top level domain of the client browser is in a developing country or transition economy free access is provided. More information about subscriptions and free access is available at http://www.nber.org/wwphelp.html. Free access is also available to older working papers.

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18873.

    as
    in new window

    Length:
    Date of creation: Mar 2013
    Date of revision:
    Publication status: published as Biofuels, Binding Constraints, and Agricultural Commodity Price Volatility , Philip Abbott. in The Economics of Food Price Volatility , Chavas, Hummels, and Wright. 2014
    Handle: RePEc:nbr:nberwo:18873
    Note: EEE ITI
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Web page: http://www.nber.org
    Email:


    More information through EDIRC

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Harri, Ardian & Nalley, Lawton Lanier & Hudson, Darren, 2009. "The Relationship between Oil, Exchange Rates, and Commodity Prices," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 41(02), August.
    2. Hochman, Gal & Rajagopal, Deepak & Zilberman, David D., 2010. "The effect of biofuel on the international oil market," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt0k93s7zg, Department of Agricultural & Resource Economics, UC Berkeley.
    3. Tyner, Wallace E. & Taheripour, Farzad & Perkis, David, 2010. "Comparison of fixed versus variable biofuels incentives," Energy Policy, Elsevier, vol. 38(10), pages 5530-5540, October.
    4. 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.
    5. Wallace E. Tyner, 2010. "The integration of energy and agricultural markets," Agricultural Economics, International Association of Agricultural Economists, vol. 41(s1), pages 193-201, November.
    6. Wallace E. Tyner & Farzad Taheripour, 2008. "Policy Options for Integrated Energy and Agricultural Markets ," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 30(3), pages 387-396.
    7. Amani Elobeid & Simla Tokgoz, 2008. "Removing Distortions in the U.S. Ethanol Market: What Does It Imply for the United States and Brazil?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 90(4), pages 918-932.
    8. 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.
    9. Hertel, Thomas & Beckman, Jayson, 2010. "Commodity Price Volatility in the Biofuel Era: An Examination of the Linkage between Energy and Agricultural Markets," GTAP Working Papers 3214, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
    10. 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.
    11. McPhail, Lihong Lu & Babcock, Bruce A., 2012. "Impact of US Biofuel Policy on US Corn and Gasoline Price Variability," Staff General Research Papers 34892, Iowa State University, Department of Economics.
    12. Gohin, Alexandre & Treguer, David, 2010. "On the (De)Stabilization Effects of Biofuels: Relative Contributions of Policy Instruments and Market Forces," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 35(1), April.
    13. McPhail, Lihong Lu, 2011. "Assessing the impact of US ethanol on fossil fuel markets: A structural VAR approach," Energy Economics, Elsevier, vol. 33(6), pages 1177-1185.
    14. Christopher L. Gilbert, 2010. "How to Understand High Food Prices," Journal of Agricultural Economics, Wiley Blackwell, vol. 61(2), pages 398-425.
    15. Scott H. Irwin & Dwight R. Sanders, 2011. "Index Funds, Financialization, and Commodity Futures Markets," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 33(1), pages 1-31.
    16. Mitchell, Donald, 2008. "A note on rising food prices," Policy Research Working Paper Series 4682, The World Bank.
    17. Walter Enders & Matthew T. Holt, 2012. "Sharp Breaks or Smooth Shifts? an Investigation of the Evolution of Primary Commodity Prices," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 94(3), pages 659-673.
    18. 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.
    19. Just David R. & Just Richard E., 2008. "Monopoly Power, Futures Market Manipulation, and the Oil Price Bubble," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 6(2), pages 1-29, December.
    20. Wyatt Thompson & Seth Meyer & Pat Westhoff, 2010. "The New Markets for Renewable Identification Numbers," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 32(4), pages 588-603.
    21. Chunrong Ai & Arjun Chatrath & Frank Song, 2006. "On the Comovement of Commodity Prices," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 88(3), pages 574-588.
    22. Cha, Kyung Soo & Bae, Jeong Hwan, 2011. "Dynamic impacts of high oil prices on the bioethanol and feedstock markets," Energy Policy, Elsevier, vol. 39(2), pages 753-760, February.
    23. Balcombe, Kelvin, 2009. "The Nature and Determinants of Volatility in Agricultural Prices," MPRA Paper 24819, University Library of Munich, Germany.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:18873. 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: ()

    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.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with 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 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.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.