Dusan Drabik

The Theory of Biofuel Policy and Food Grain Prices

We develop an analytical framework to assess the market effects of alternative biofuel policies (including subsidies to feedstocks). U.S. corn-ethanol policies are used as an example to study the effects on corn prices. We determine the ‘no policy’ ethanol price; analyze the implications for the ‘no policy’ corn price and resulting ‘water’ in the ethanol price premium due to policy; and generalize the unique interaction effects between mandates and tax credits to include ethanol and corn production subsidies. The effect of an ethanol price premium depends on the value of the ethanol by-product, the value of production subsidies, and where the world ethanol price is determined. U.S. corn-ethanol policies are a major reason for the increases in corn prices – an estimated increase of 26 – 45% in the period 2008 – 2011.

Components of carbon leakage in the fuel market due to biofuel policies

future science group www.future-science.com 119 10.4155/BFS.11.8

Policy Update: The effect of biofuel policies on food grain commodity prices

The consensus in the extensive literature on the causes of recent grain price increases is that biofuel policies are only one of a multitude of contributing factors. Typical studies include Headey and Fan [1] who attribute a ‘near-perfect storm’ of factors to the price increase, or Abbott et al. [2,3], who argue that it has been a ‘complex maze of factors’ where ‘one cannot with any precision partition the effects’ and although biofuels is one ‘driver’ of many, only 25% of biofuels’ contribution to the price rise is due to biofuel policy. A brief summary of the many different categories of economic models used to analyze price increases is given in Table 1. While many studies model production of ethanol as a rightward shift in the price inelastic demand curve for corn (ethanol is ‘manna from heaven’ – see the biofuels category in Table 1), our approach is based on the ‘theory of biofuel policy’. This theory explains the price linkages, under alternative policies, among biofuels, their feedstocks and fossil fuel (oil). It also provides the means to determine whether a tax credit or a blend mandate determines the ethanol price in the USA or in the rest of the world (see [4] for a recent ana lysis and [5] for an earlier contribution; for a review of the earlier literature, see [6]). Our ana lysis comes to a much different conclusion; notably that biofuel policies are a major reason for the increases in grain prices – an estimated increase in corn prices of 38% in 2010. In the rest of this commentary, we summarize our results on the effects of ethanol policies on corn prices for the year 2010, drawing heavily on the more detailed theoretical and empirical ana lysis of [4]. Consider first the potential effects of the current federal plus state corn ethanol blenders’ tax credits of US52¢/gallon corn prices. First of all, a bushel (bu) of corn produces 2.8 gallons of ethanol, so a 1¢ increase in the ethanol price would result in at least a 2.8¢/bu increase in the corn price. However, in reality about 26% of the value of corn used in the production of ethanol in 2010 was returned to the market as a by-product. Therefore, 2.8 divided by 1 minus 0.26 yields a corn price increase of 3.79¢/bu for every 1¢/gallon increase in ethanol prices. Tax credits of 52¢/gallon should therefore increase the corn price by US

Transaction costs, product specialisation and farm structure in Central and Eastern Europe

1.96/bu. That is a considerable amount! With a 2010 corn price average of

An Economic Model of Brazil's Ethanol-Sugar Markets and Impacts of Fuel Policies

3.83, the implication is that if the tax credit determined corn prices in 2010 (we show below it did not; the mandate did along with the influence of production subsidies for both corn and ethanol), corn prices without ethanol policy (the tax credit here) would have been

Policy Update: Biofuel policies and grain crop price volatility

1.87/bu. However, our ana lysis finds 2010 corn prices without ethanol would be

Policy Update: Policy implications of high RIN prices and the ‘blend wall‘

2.77 (determined by the intersection of the corn supply and total non-ethanol corn demand curves), and we determine that the ethanol price with no tax credit (but with a volumetric fuel tax) would have been

Policy Update: Why ethanol prices are so high in Brazil

1.28/bu in 2010. The hypothetical price is low because it assumes a zero tax credit (see [4] for a detailed explanation). If there was only the tax credit in 2010, corn prices would have been

Biofuels policy, drought and corn price

3.24/bu (

Water Use for Biofuels in Europe

1.28 plus