Commodity Storage and the Market
Effects of Biofuel Policies
Colin Carter, Gordon Rausser, and Aaron Smith
ARE 50th Anniversary Celebration
UC Davis
March 20, 2015
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Food versus fuel is the dilemma regarding the risk
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of diverting farmland or crops for biofuels production
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to the detriment of the rood supply. The biofuel and
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can or should be done to remedy the situation. This
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An ethanol fue l plant under co nstruction, BuUer County, Iowa
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Biofuel production has increased in recent years. Some commodities like maize (corn), sugar cane or vegetable oil can
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ethanol production, reaching 25% in 2007) 61 second generation biofuels could potentially combine farming for food and
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place since 2003 and the desire to reduce oil dependency as well as reduce GHG emissions from transportation, there is
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also fear of the potential destruction of natural habitats by being converted into farmland.181 Environmental groups have
raised concerns about this trade-off for several years,19ll10ll11ll 121 but now the debate reached a global scale due to the
2007- 2008 world food price crisis. On the other hand, several studies do show that biofuel production can be significantly
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scarcity_
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Ag ricultural econ omics ori
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1 Origins
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3. 1 Agri cultural environment and natural resources
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3 2 Food and consum er economics
3 3 Production economics and farm m anagem ent
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Heterodox economics · Methodology ·
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Econometrics · Economic growth ·
Economic system · Experimental economics ·
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Gordon Rausser
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Gord on Rausser is the Robert Gordon Sproul Distinguished Professor in
California, Berkeley. He is an economist who served on the Council of
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Econom ic Advisors under President Ronald Reagan ( 1986-87) and as Chief
Econom ist at the Agency for International Development ( 1988- 90). He also
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co-founded the Institute for Policy Reform in Washington, D.C., in 1989. The
institute's purpose was to enhance the foundation for economic growth in
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developing countries by supporting and disseminating research in the field
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of economic and policy reform. Rausser served as president of the IPR for 5
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years ( 1990- 94 ). Rausser's distinguished governmental service has been
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the Department of Agricu lture and Resource Economics at the University of
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recogn ized with a Superior Unit Citation Award from the Agency for
International Development (1990 ).
Rausser has won 16 national research and teaching awards from such
organizations as Harvard University, the American Agricultural Economics
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Association, and the Western Agricultural Econom ics Association. His
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Professor
organization, and antitrust analysis. He has published hundreds of well-regarded articles and several books. His most
recent book is Political Power and Economic Policy: Theory, Analysis, and Empirical Applications (20 11 ). of which he is
the lead author, published by Cambridge UniVersity Press. Political Power and Economic Policy analyzes the links
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between political economics, governance structures, and the distribution of political power in economic policy making.
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In recognition of Rausser's important contributions to his field, he has been nominated as fellow of the American
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Association for the Advancement of Science, the American statistical Association, and the American Agricu ltural
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Economics Association, among several other national and international scholarly UC
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Colin A. Carter is Professor of Agricultural and Resource Economics at the University of California, Davis_ His
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Carter is an Albertan_He was born and raised on a grain farm in Sexsmith, Alberta , Canada_He obtained a BA in
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Economics and an MS in Agricultural Economics from the University of Alberta_He then studied at University of
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California, Berkeley where he completed a MA in Economics and a Ph_D_ in Agricultural Economics in 1980_ From 1980
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to 1986, he held the position of Assistant Professor in Agricultural Economics at the University of Manitoba_He is now a
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Carter has published more than 130 research papers, and has authored or edited 15 books_He has published in the
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areas of international trade. commodity markets. agricultural policy, futures and options markets. the econom ics of
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China 's agriculture. and the economics of agricu ltural biotechnology_Colin has received a number of professional awards
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for Quality of Research Discovery; for Quality of Communication. and for Distingu ished Policy Contribution_l1l 1n 2001. he
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won the American Agricultural Economics Association (AAEA) award for ·outstanding Essay for the 21st century" for Wiii
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China Become a Major Force in World Food Markets7, co-authored with Scott Rozelle_l21carter was named Fellow of
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AAEA in 2000 in recognition of his contributions to the field of agricultural economics.131
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Carter has written a textbook on Futures and Options Marketsl 41and teaches a UC Davis undergraduate class on futures
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and options markets and a graduate class on international commodity trade_In 2013, he was listed as one of the 15
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Commodity-Friendly professorsl51 on commodity HQ @_161
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Since 1985, he has travelled extensively to China, studying China's domestic commodity markets and China's
participation in the international agricultural market In 1988, with Professor Funing Zhong from Nanjing Agricultural
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University, he published one of the first books to explain the economic ettects of the decollectivization of China's
agriculture_
Carter has taken an active role in national and international professional societies_From 1986-89, he held a 3-year
fellowship in international food systems from the Kellogg Foundation_Colin served as cha ir of the UC Davis Department
of Ag ricultural and Resource Economics from 1998 to 2001 _He is currently Chair of the Giannini Foundation of
Agricultural Economics_m
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e of American rapper Shwayze
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UC Davis, Agricultural and Resource Economics
Commodity Storage and the Market
Effects of Biofuel Policies
Colin Carter, Gordon Rausser, and Shwayze
ARE 50th Anniversary Celebration
UC Davis
March 20, 2015
Annual Disappearance of US Corn
14000
12000
"' 10000
• Exports
Q)
.c
"'
..c
c
:J
·-E
0
8000
• Food
6000
• DOG from Ethanol
• Feed
•Ethanol
4000
2000
0
1980
1985
1990
1995
2000
2005
2010
UC Davis, Agricultural and Resource Economics
The Renewable Fuel Standard
• 38% of corn used for ethanol this year
(26% after accounting for DDG)
• RFS2 (2007) doubled the mandate over
RFS1
• This paper estimates the effect of the
RFS2 on corn prices
UC Davis, Agricultural and Resource Economics
RFS Now At Crossroads
• We have hit the blend wall
• No cellulosic production
UC Davis, Agricultural and Resource Economics
We Need to Model Inventory Dynamics
• Corn is storable – on average 18% of crop is carried into following year
• A permanent shock has a larger price effect than a transitory shock
• Permanent shocks cannot be mitigated by drawing down inventory
• Most price variation comes from transitory weather shocks
• Standard regression models identify the effect of transitory shocks
• Ethanol building boom began in 2006, but many of those plants did not
produce until late 2007 or 2008
• 2006 Ethanol Production:
• Capacity under construction in Feb 2007:
5.5b gallons
5.6b gallons
• Rational storage firms would have increased demand for inventory in 2006
UC Davis, Agricultural and Resource Economics
Permanent Demand Shift in a Partially Identified VAR
it α 23 ( ft + cyt ) + α 21REAt + B1′ Xt −1 + Γ1′ Zt + u2t
=
ft = −α 32 it
+ α 31REAt + B2′ Xt −1 + Γ′2 Zt + u3t
cyt = −α 42 it + α 43 ft + α 41REAt + B3′ Xt −1 + Γ′3 Zt + u4t
u
Qs
u Q
,
α23 = η
−η
I
I
Assume
s
• ηu ≤ -0.1, It/Qt ≥ 0.4
• 0.25 ≤ α23 ≤ 1/α32
slide 10/134
UC Davis, Agricultural and Resource Economics
Detrended Data
C
Real Economic Activity Index
0.6
0.1
-0.4
-0.9
1960
1965
1970
1975
1980
2
1985
1990
1995
2000
2005
2010
1995
2000
2005
2010
1995
2000
2005
2010
1995
2000
2005
2010
Log Inventory
1
0
-1
-2
1960
1
1965
1970
1975
1980
1985
1990
Log Real Futures Price
0.5
0
-0.5
1960
0.4
1965
1970
1975
1980
1985
1990
Convenience Yield
0.2
0
-0.2
1960
1965
1970
1975
1980
1985
1990
UC Davis, Agricultural and Resource Economics
Estimation and Analysis
• We estimate the parameters using data from 1961-2005
• Model selection criteria indicate that a single lag is sufficient
• We decompose the observed data into components emanating from
each of the four structural shocks
•
•
•
•
Real economic activity
Inventory supply
Inventory demand
Supply of storage
• We estimate the ethanol effect in two ways
• a counterfactual experiment in which the only shocks to inventory supply and demand
in 2006-2012 were from weather
• long-run effect of a 1.3 billion bushel permanent increase in demand for corn implied
by model parameters
UC Davis, Agricultural and Resource Economics
Counterfactual: No Ethanol Shocks
Cash Price
log(real price)
2
1.5
1
0.5
0
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Log Difference Between Observed and Counterfactual
Counterfactual
Implied Price Effects
Actual
2006
2007
2008
2009
2010
2011
2012
Ave
.26
.41
.14
.18
.52
.56
.28
.34
UC Davis, Agricultural and Resource Economics
Long-Run Effect Estimated From Parallel Shifts
Estimated Price Effect (in log terms)
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
Exactly
Set
Identified Identified
Exactly
Set
Identified Identified
Exactly
Set
Identified Identified
Extrapolate
from 1%
Extrapolate
from 10%
Extrapolate
from 50%
Exactly
Set
Identified Identified
100%
UC Davis, Agricultural and Resource Economics
Conclusion
• Between 2006 and 2013, corn prices were about 30% higher on average than they
would have been without ethanol growth
• Inventory dynamics mean that this effect was largest in 2006-07 when precautionary demand
raised inventory and 2010-11, when inventory supplies got low
• Separating the effects of permanent and transitory shocks is important
• The RFS is currently at a crossroads
• Ethanol content in gasoline has hit a ceiling at 10% – the so-called blend wall
• Cellulosic (2nd generation) biofuels have not yet materialized
UC Davis, Agricultural and Resource Economics