Discussion Topic 4: Biofuels and Food Price Volatility

1. Impact of US Ethanol Production
on Price Volatility
Bruce Babcock
Iowa State University
Presented at Workshop on Biofuels and Food Security Interactions, IFPRI, Washington DC, Nov 19-20.

2. Questions
• What impact did biofuel production have on
commodity prices in the 2012 drought year?
• What role did biofuel policy play in
determining the magnitude of the price
increase?

3. 0
1
2
3
4
5
6
7
8
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
$perbushel
US Corn Prices Since 2004

4. 0
2000
4000
6000
8000
10000
12000
14000
0
1
2
3
4
5
6
7
8
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
millionbushels
$perbushel
US Corn Prices and Non-Ethanol Supplies
Price Non- Ethanol Use

5. 100
110
120
130
140
150
160
170
180
1985 1990 1995 2000 2005 2010 2015 2020
bushelsperacre
US Corn Yields since 1990
2009: Above
trend, poor
quality
’10 ’11 ‘13 :
below trend,
good quality
2012 drought
Bumper crop
in 2014

6. 0
500
1000
1500
2000
2500
3000
3500
4000
4500
Change in US Corn Supply Change in Corn Used by
Ethanol Plants
Change in Net Corn Used by
Ethanol Plants
Comparing 2014 to 2004

7. 0
1
2
3
4
5
6
7
8
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
$perbushel
US Corn Prices Since 2004

8. Impact of Ethanol in Drought Year
• How best to measure?
– Re-run history without the drought
– Simulate a re-running of history without a drought

9. The Impact of Ethanol and Ethanol Subsidies on Corn Prices:
Revisiting History (Babcock and Fabiosa, 2011)
• Increase in corn price = $1.65 (Avg increase 2006-2009)
– Amount due to ethanol subsidies: $0.14
– Amount due to market demand: $0.45
– Amount due to ethanol: $0.59

10. Results from a New Model*
• What if 2012 drought had hit again in 2014?
• Impact on corn prices
– Under current policy
– Waiver of the mandate
– Restriction on use of ethanol
Zhou, W, and BA Babcock. “Estimating the Impact of Ethanol on Corn Prices Using the
Competitive Storage Model.” Under review, Energy Economics.

11. 0
1
2
3
4
5
6
7
8
2013 2014 2015 2015 2017 2018 2019
$perbushel
Impact of Drought on Corn Prices under Alternative
Ethanol Scenarios
Baseline

12. 0
1
2
3
4
5
6
7
8
2013 2014 2015 2015 2017 2018 2019
$perbushel
Impact of Drought on Corn Prices under Alternative
Ethanol Scenarios
Baseline
Drought, current law

13. 0
1
2
3
4
5
6
7
8
2013 2014 2015 2015 2017 2018 2019
$perbushel
Impact of Drought on Corn Prices under Alternative
Ethanol Scenarios
Baseline
Drought, current law
Drought, mandate waiver

14. 0
1
2
3
4
5
6
7
8
2013 2014 2015 2015 2017 2018 2019
$perbushel
Impact of Drought on Corn Prices under Alternative
Ethanol Scenarios
Baseline
Drought, current law
Drought, mandate waiver
Drought, ethanol restricted to 5 BG