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Biofuels: Potential Production Capacity, Effects on Grain and Livestock Sectors, and Implications for Food Prices and Consumers

Author

Listed:
  • Hayes, Dermot J.
  • Babcock, Bruce
  • Fabiosa, Jacinto F.
  • Tokgoz, Simla
  • Elobeid, Amani
  • Yu, Tun-Hsiang E.
  • Dong, Fengxia
  • Hart, Chad
  • Chavez, Eddie
  • Pan, Suwen
  • Carriquiry, Miguel
  • Dumortier, Jerome
Abstract
We examined four evolution paths of the biofuel sector using a partial equilibrium world agricultural sector model in CARD that includes the new RFS in the 2007 EISA, a two-way relationship between fossil energy and biofuel markets, and a new trend toward corn oil extraction in ethanol plants. At one extreme, one scenario eliminates all support to the biofuel sector when the energy price is low, while the other extreme assumes no distribution bottleneck in ethanol demand growth when the energy price is high. The third scenario considers a pure market force driving ethanol demand growth because of the high energy price, while the last is a policy-induced shock with removal of the biofuel tax credit when the energy price is high. Standard results hold where the biofuel sector expands with higher energy price, raising the prices of most agricultural commodities through demand side adjustment channels for primary feedstocks and supply side adjustment channels for substitute crops and livestock. On the other hand, the biofuel sector shrinks coupled with opposite impacts on agricultural commodities with the removal of all support including the tax credit. Also, we find that given distribution bottlenecks, cellulosic ethanol crowds marketing channels resulting in a corn-based ethanol price that is discounted. The blenders’ credit and consumption mandates provide a price floor for ethanol and for corn. Finally, the tight linkage between the energy and agricultural sectors resulting from the expanding biofuel sector may raise the possibility of spillover effects of OPEC’s market power on the agricultural sector.

Suggested Citation

  • Hayes, Dermot J. & Babcock, Bruce & Fabiosa, Jacinto F. & Tokgoz, Simla & Elobeid, Amani & Yu, Tun-Hsiang E. & Dong, Fengxia & Hart, Chad & Chavez, Eddie & Pan, Suwen & Carriquiry, Miguel & Dumortier,, 2009. "Biofuels: Potential Production Capacity, Effects on Grain and Livestock Sectors, and Implications for Food Prices and Consumers," ISU General Staff Papers 200908010700001420, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genstf:200908010700001420
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    1. 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.
    2. 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 (archive only) 07-sr101, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    3. 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.
    4. Simla Tokgoz & Amani Elobeid & Jacinto Fabiosa & Dermot J. Hayes & Bruce A. Babcock & Tun-Hsiang (Edward) Yu & Fengxia Dong & Chad E. Hart, 2008. "Bottlenecks, Drought, and Oil Price Spikes: Impact on U.S. Ethanol and Agricultural Sectors," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 30(4), pages 604-622.
    5. Searchinger, Timothy & Heimlich, Ralph & Houghton, R. A. & Dong, Fengxia & Elobeid, Amani & Fabiosa, Jacinto F. & Tokgoz, Simla & Hayes, Dermot J. & Yu, Hun-Hsiang, 2008. "Use of U.S. Croplands for Biofuels Increases Greenhouse Gases Through Emissions from Land-Use Change," Staff General Research Papers Archive 12881, Iowa State University, Department of Economics.
    6. Westhoff, Patrick C. & Thompson, Wyatt & Meyer, Seth D., 2008. "Biofuels: Impact of Selected Farm Bill Provisions and other Biofuel Policy Options," FAPRI-MU Report Series 37772, Food and Agricultural Policy Research Institute (FAPRI).
    7. Xiaodong Du & Dermot J. Hayes, 2008. "Impact of Ethanol Production on U.S. and Regional Gasoline Prices and on the Profitability of the U.S. Oil Refinery Industry, The," Center for Agricultural and Rural Development (CARD) Publications 08-wp467, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    8. Thompson, Wyatt & Meyer, Seth D. & Westhoff, Patrick C., 2008. "Model of the US Ethanol Market," FAPRI-MU Report Series 37971, Food and Agricultural Policy Research Institute (FAPRI).
    9. Kalaitzandonakes, Nicholas G. & Kaufman, James & Meyer, Seth D. & Thompson, Wyatt, 2008. "The Impact of Biotech Corn Traits on Ethanol Production," Environmental and Rural Development Impacts Conference, October 15-16, 2008, St. Louis, Missouri 53499, Farm Foundation, Transition to a Bio Economy Conferences.
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    More about this item

    JEL classification:

    • Q13 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Markets and Marketing; Cooperatives; Agribusiness
    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy; Animal Welfare Policy
    • Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)

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