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The Role of Biofuel Policy and Biotechnology in the Continued Development of the Ethanol Industry in the United States. Seth Meyer Economist Global Perspective Studies Group FAO, Rome. Wyatt Thompson Julian Binfield Food and Agricultural Policy Research Institute

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slide1

The Role of Biofuel Policy and Biotechnology in the Continued Development of the Ethanol Industry in the United States

Seth Meyer

Economist

Global Perspective Studies Group

FAO, Rome

Wyatt Thompson

Julian Binfield

Food and Agricultural Policy Research Institute

University of Missouri, USA

agenda
Agenda
  • Model Overview
  • Biofuel policy and effects of US mandate removal on biofuel and agricultural markets
  • Simulation of technology adoption in the context of US biofuel policy, who benefits and why?

In the long run maize prices can’t be too cheap (relative to oil) too long but in the medium run (10 years) there can be substantial divergence.

a model of us agriculture and biofuel markets and policy
Deterministicprojections: single solution for endogenous variables based on a single set of assumptions. Smooth yield paths over 10 years.

Stochastic projections: (500 solutions based on 500 sets of assumptions in this case) introduces variability

Biofuel and agricultural policies are often non-linear and thus context plays a critical role in the results.

Explore both levels and variability.

A Model of US Agriculture and Biofuel markets and policy
stochastic model part 1
Stochastic model, part 1
  • US partial equilibrium model
    • Rest of world represented with reduced form equations
    • Covers crop, livestock, biofuel (and energy) markets
  • Dynamic
    • Solves for 10 consecutive years (2012/13 to 2021/22)
    • Has some path dependency
    • Includes some investment behavior (e.g., livestock, biofuel capacity)
  • Hybrid
    • Some parameters estimated econometrically
    • Others based on judgment, but calibrated to market data and often reviewed
stochastic model part 2
Stochastic model, part 2
  • Exogenous variables drawn from grouped joint distributions
    • Crop yield error terms (equations include trend & prices)
    • Energy prices and input costs (PE model)
    • Domestic demand equation error terms
    • Stock demand equation error terms
    • Trade error terms (world uncertainty)
      • 500 sets of 10 year solutions in this case
mandate policy
Mandate Policy

No Policy

Mandates (RFS)

SM

SM

PP

RIN

PM

PC

DM

DM

QM

QM

QPolicy

*Simplification which excludes, among other things, wholesale to retail markup

growth of biofuel mandates rfs
Growth of biofuel mandatesRFS

How do blenders show they complied? RINS

ethanol and biodiesel production average 2017 20211
Ethanol and Biodiesel Production (average 2017-2021)

59.7

billion liters

maize

ethanol

53.7

billion liters

maize

ethanol

ethanol and biodiesel use average 2017 2021
Ethanol and Biodiesel Use(average 2017-2021)

73.3

billion liters

all ethanol

ethanol and biodiesel use average 2017 20211
Ethanol and Biodiesel Use(average 2017-2021)

73.3

billion liters

all ethanol

53.3

billion liters

all ethanol

consumer demand and the blend wall
Consumer demand and the blend wall
  • Market segmented into involuntary, E10/E15 and E85

PE/PG

QE

Involuntary

E10/E15

E85

No Policy

RFS

consumer demand and the blend wall1
Consumer demand and the blend wall
  • Market segmented into involuntary, E10/E15 and E85

PE/PG

QE

Involuntary

E10/E15

E85

No Policy

RFS

slide19
National maize yields in 2021 under the baseline and under improved maize yields (bu/ac)NEGATIVE baseline yield deviations cut by 50%
slide21
Effects of Yield improvement with RFSbillions of dollars annually(2017-21 average of 500 stochastic outcomes)
conclusions
Conclusions
  • Policy supports farm income but costs to consumers of food and fuel are large
  • US biofuel policy increases maize prices and may increase price volatility
  • Short run inelasticity in biofuel demand means benefits from technology flow to consumers
  • The blend wall and production capacity may limit (medium term) demand elasticity even in the absence of policy
thanks
THANKS!
  • To contact Seth Meyer (presentor): Seth.Meyer@fao.org
  • To contact Wyatt Thompson (co-author): ThompsonW@missouri.edu
  • To contact Julian Binfield (co-author): BinfieldJ@missouri.edu
how can stochastic analysis help where the knowing the mean is insufficient
How can stochastic analysis help?Where the knowing the mean is insufficient
  • Policy evaluation
    • price supports
    • Stock programs
    • Biofuel mandates
  • Climate change and mitigation
    • Impacts and adaptation
  • Production technologies
    • Drought/flood resistant germplasm
conclusions1
Conclusions
  • Context is important (blend wall, oil prices…)
  • Current US biofuel policy increases maize prices and may increase farm price volatility
  • Mandates, blend wall, and inelasticity in other demands push technology benefits to consumers not producers
  • Cochrane’s treadmill not yet stopped?
chart ideas
Chart ideas
  • Capacity and Capacity Utilization
  • Maize ethanol net returns.
  • E85 and E15 use