Ravello June 2012 Meyer, Binfield and Thompson Seth Meyer Economist Global Perspective Studies Group FAO, Rome The Role of Biofuel Policy and Biotechnology

Ravello June 2012Meyer, Binfield and Thompson

Seth MeyerEconomistGlobal Perspective Studies GroupFAO, Rome

The Role of Biofuel Policy and Biotechnology in the Continued

Development of the Ethanol Industry in the United States

Wyatt ThompsonJulian Binfield

Food and Agricultural Policy Research InstituteUniversity of Missouri, USA


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

• Deterministic projections: 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.


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• 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


Yield effect on prices and returns(2021/22 crop year)

8 9 10 11 12 13 140

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maize yield - metric tons per hecteare

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8 9 10 11 12 13 140

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maize yield - metric tons per hecteare

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maize farm price maize mkt. net-ret


Mandate Policy

SM

DM

QM

PM

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

SM

DM

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PP

PC

QPolicy

No Policy Mandates (RFS)

RIN


Growth of biofuel mandatesRFS

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 20220

20000400006000080000

100000120000140000160000

Total AdvancedCellulosic Biodiesel

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How do blenders show they complied? RINS


Ethanol and Biodiesel Production (average 2017-2021)

RFS No-RFS0

10000

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maize-ET cellulosic-ET imports-ETother biodiesel

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59.7 billion litersmaize

ethanol


Ethanol and Biodiesel Production (average 2017-2021)

RFS No-RFS0

10000

20000

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maize-ET cellulosic-ET imports-ETother biodiesel

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ethanol


ethanol


Ethanol and Biodiesel Use(average 2017-2021)

RFS No-RFS0

10000

20000

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Use-ET Use-BD Exports-ET Exports-BD

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73.3 billion litersall ethanol


Ethanol and Biodiesel Use(average 2017-2021)

RFS No-RFS0

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Use-ET Use-BD Exports-ET Exports-BD

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Effects of biofuel policies(2017-21 average of 500 stochastic outcomes)

RFS No Policy

Ethanol production (bil. liters) 69.08 56.02 -18.9%

From Maize (bil. liters) 59.67 53.65 -10.1%

Ethanol consumption (bil. liters) 73.36 53.34 -27.3%

Maize yield (tons per ha) 11.17 11.15 -0.2%

Maize price ($ per ton) 184.26 174.42 -5.3%

Wheat price ($ per ton) 222.67 214.88 -3.5%

Soybean price ($ per ton) 421.85 393.24 -6.8%

Maize Production (mt) 376.94 370.84 -1.6%

Maize used for feed (mt) 131.22 137.21 4.6%

Maize exports (mt) 61.22 63.52 3.8%

Ethanol producer price (cents/liter) 0.54 0.51 -6.1%

Ethanol consumer price (cents/liter) 0.58 0.68 16.2%


Consumer demand and the blend wall

• Market segmented into involuntary, E10/E15 and E85

Involuntary E10/E15 E85

PE/PG

QE

RFS No Policy


Consumer demand and the blend wall

• Market segmented into involuntary, E10/E15 and E85

Involuntary E10/E15 E85

PE/PG

QE

RFS No Policy


Capacity and Utilization in Ethanol Dry-Mills

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 20210

10,000

20,000

30,000

40,000

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60,000

70,000

84%

86%

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90%

92%

94%

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100%

No Policy Baseline Series3 Series4

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Aggregate Effects of RFS Removal(2017-2021 average)

-25

-20

-15

-10

-5

0

5

-4.97

0.03

-20.69

-2.36

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Policy effect on maize price level and volatility (2021)

Under $100

$100 to $125

$125 to $150

$150 to $175

$175 to $200

$200 to $225

$225 to $250

$250 to $275

Over $275

0.00

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RFS2 No Policymaize price $/tonne

fre

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* Maize farm price 2021 solutions


National maize yields in 2021 under the baseline and under improved maize yields (bu/ac)

NEGATIVE baseline yield deviations cut by 50%

0 32 64 96 1281601922242562883203523844164484808

9

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Baseline Yield Technology

sorted yield draws 1-500yie

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Effects of Yield improvement with RFS(2017-21 average of 500 stochastic outcomes)

Absolute change % change

Maize yield (tons per ha) 0.16 1.4%

Maize price ($ per ton) -4.96 -2.7%

Wheat price ($ per ton) -2.31 -1.0%

Soybean price ($ per ton) -3.20 -0.8%

Maize Production (mt) 3.85 1.0%

Maize used for feed (mt) 1.75 1.3%

Maize exports (mt) 1.45 2.4%

Ethanol production (mil. liters) 166 0.2%

From Maize (mil. liters) 221 0.4%

Ethanol consumption (mil. liters) 33 0.0%

Ethanol producer price (cents/liter) -.01 -1.5%

Ethanol consumer price (cents/liter) -.00 -0.1%


Effects of Yield improvement with RFSbillions of dollars annually

(2017-21 average of 500 stochastic outcomes)

With RFS Absolute change % change

Net Farm Income -1.14 -1.2%

Net CC outlays -0.04 -0.4%

Biofuel policy consumer costs -0.54 -2.6%

US Food expenditures -1.00 -0.1%

No Policy Absolute change % change

Net Farm Income -1.27 -1.4%

Net CC outlays -0.04 -0.5%

Biofuel policy consumer costs NA NA

US Food expenditures -0.89 -0.06%


Effect on market net-returns (dollars per acre)

-50 -40 -30 -20 -10 0 10 20 30-60

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base yield deviaions

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Effect on market net-returns (dollars per acre)

-50 -40 -30 -20 -10 0 10 20 30-60

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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!

• To contact Seth Meyer (presentor): [email protected]

• To contact Wyatt Thompson (co-author): [email protected]

• To contact Julian Binfield (co-author): [email protected]

mailto:[email protected]




A slight detourPolicy effect on biofuel trade

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RFS2 No policy

Imports - billion litres

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Effects on farm prices (dollars per bushel)

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Effects on farm prices (dollars per bushel)

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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


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

• Capacity and Capacity Utilization• Maize ethanol net returns. • E85 and E15 use

Documents

Ravello June 2012 Meyer, Binfield and Thompson Seth Meyer Economist Global Perspective Studies Group FAO, Rome The Role of Biofuel Policy and Biotechnology