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Seth Meyer Economist Global Perspective Studies Group FAO, Rome

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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Seth Meyer Economist Global Perspective Studies Group FAO, Rome

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  1. 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

  2. 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.

  3. 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

  4. 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

  5. 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

  6. Yield effect on prices and returns(2021/22 crop year) maize farm price maize mkt. net-ret

  7. 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

  8. Growth of biofuel mandatesRFS How do blenders show they complied? RINS

  9. Ethanol and Biodiesel Production (average 2017-2021) 59.7 billion liters maize ethanol

  10. Ethanol and Biodiesel Production (average 2017-2021) 59.7 billion liters maize ethanol 53.7 billion liters maize ethanol

  11. Ethanol and Biodiesel Use(average 2017-2021) 73.3 billion liters all ethanol

  12. Ethanol and Biodiesel Use(average 2017-2021) 73.3 billion liters all ethanol 53.3 billion liters all ethanol

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

  14. Consumer demand and the blend wall • Market segmented into involuntary, E10/E15 and E85 PE/PG QE Involuntary E10/E15 E85 No Policy RFS

  15. Consumer demand and the blend wall • Market segmented into involuntary, E10/E15 and E85 PE/PG QE Involuntary E10/E15 E85 No Policy RFS

  16. Capacity and Utilization in Ethanol Dry-Mills

  17. Aggregate Effects of RFS Removal(2017-2021 average)

  18. Policy effect on maize price level and volatility (2021) * Maize farm price 2021 solutions

  19. National maize yields in 2021 under the baseline and under improved maize yields (bu/ac)NEGATIVE baseline yield deviations cut by 50%

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

  21. Effects of Yield improvement with RFSbillions of dollars annually(2017-21 average of 500 stochastic outcomes)

  22. Effect on market net-returns (dollars per acre)

  23. Effect on market net-returns (dollars per acre)

  24. 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

  25. 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

  26. A slight detourPolicy effect on biofuel trade

  27. Effects on farm prices (dollars per bushel)

  28. Effects on farm prices (dollars per bushel)

  29. Maize used for ethanol (million bushels)

  30. Maize used for ethanol (million bushels)

  31. 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

  32. 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?

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

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