The Economics of Biofuel Policies: Impacts on Price Volatility in Grain and Oilseed Markets

• Agricultural Economics Workshop
• Departmental Seminar

Date and Location

Tuesday, March 31, 2015, 4:10 PM - 5:30 PM
ARE Conference Room, 2102 Social Sciences and Humanities

Abstract

The book is all about why cereal and oilseed prices tripled within 12 months in 2007-2008. And why they reached higher peaks in 2010-11 and again in 2012. The book is also about the reversal in the long run decline in the real prices of food commodities and the higher volatility in prices. We make the argument that it is because of biofuel policies. And why it is different this time – biofuel policies created a link between crop and biofuel prices for the first time ever. And, for example, the corn-ethanol price multiplier is very high and so ethanol has a huge impact on prices. And because of these price links, there is a minimum biofuel prices can go (given crude oil prices) and so likewise, a minimum crop prices can go. We develop a new theory of biofuel policies and hence of crop price determination. We determine, on average over a 4 year time period that 80% of the crop price increase would have occurred regardless of all other supply/demand shocks and inventory levels. This is due just to biofuel policies (the new counterfactual is these price links; not the good old days of no biofuels). We reject the “perfect storm” explanation where some cosmic roll of the dice made umpteen independent events occur simultaneously. These factors could only have contributed to 20% of the price increase. We determine another $1 billion per day subsidy, this time to crop producers due to biofuel policies.