The impact of US biofuel policies on agricultural price levels and volatility

Purpose – The purpose of this paper is to examine the market impacts of US biofuels and biofuel policies. Design/methodology/approach – Two methods of analysis are employed. The first method looks back in time and estimates what US crop prices would have been during the 2005 to 2009 marketing years under two scenarios. The second method of analysis is forward looking and examines the market impacts of the blender tax credit and mandate on the distribution of prices in the 2011 calendar and marketing year. Findings – The results developed in the previous two sections show that US ethanol policies modestly increased maize prices from 2006 to 2009 and that market impacts of the policies will be larger under tighter market conditions. Practical implications – More flexible US biofuel policy including removing the blenders tax credit, which does not help US biofuel industry as long as the mandates are in place, and relaxing blending mandates when feedstock supplies are low. Originality/value – This report makes three contributions to understanding the extent to which US biofuel policies contribute to higher agricultural and food prices. First, estimates of the impact of US ethanol policies on crop and food prices reveal that the impacts of the subsidies were quite modest. The second contribution is to provide estimates of the impact on agricultural commodity prices and food prices from market-driven expansion of ethanol. The final contribution of this report is improved insight into how current US biofuel policies are expected to affect crop prices in the near future. JEL classification: Q13 Q57 Q58