Summary 10/28/2014. Context: Eight years of turmoil in world grain/oilseed prices

Transcription

1 /8/ Harry de Gorter Charles H. Dyson School of Applied Economics and Management Cornell University Slides for presentation NARDeP Webinar, 7 October. Summary Biofuel policies had a great impact in raising crop prices The environmental effects of biofuels are negative Biofuel policy is a double edged sword in trying to improve farm incomes and rural development construction created shortterm jobs in rural communities higher crop prices due to biofuels are an implicit tax on valueadded agriculture Context: Eight years of turmoil in world grain/oilseed prices Corn Wheat Soybeans Rice.... All prices move together (competition for land and substitution in demand)

2 Nebraska EthanolPrice Rack( $/gallon Corn, No. yellow U.S. Central IL Dollars per bushel /8/ How do past price booms compare? 8 Korean War Real price indices Devaluation Russian grain robbery Recent Boom Agriculture 8 Metals Energy Role of biofuel policies? U.S. environmental and energy policy the trigger and now dominate U.S. agricultural policy secondary and now reactionary in new Farm Bill. Oil, Ethanol and Corn Prices Jan Sept Ethanol Oil (index) Corn MTBE ban 8 7. Oil > $/barrel..

3 $/bushel Sep7 Nov7 Jan8 Mar8 May8 Jul8 Sep8 Nov8 Jan9 Mar9 May9 Jul9 Sep9 Nov9 Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep /8/, Corn prices catching up to ethanol capacity,,, 8, Ethanol plant capacity plus under construction Mexico Tortilla Crisis Jan 7 Farm price of corn up 88% (KC # white corn up 7%) Corn price Doubling of U.S. mandate in Dec 7 India wheat export ban Feb 7 * *, *,, corn prices flat Oct 7 Relevant Price Linkages CropBiofuelEnergyCrude oil CornEthanol Strong positive (e.g., for corn) EthanolGasoline Strong positive or weak negative if mandate GasolineCrude oil Strong positive 8 How well does price link equation predict? Corn price (actual) Predicted corn price (de GorterDrabikJust formula) Prediction error 8.9 (9%). (%). (7%). (%). (%). (7%) 9

4 /8/ Biofuel policies the cause Created a link between crop and biofuel prices Ethanol price premium due to policy very high Biofuelcrop price multipliers very high states of nature for biofuel prices:. Lowest when locked to energy prices. Or float up and away (mandate premium) New counterfactual is the cropbiofuel price link Would not have happened without biofuel policies 8 7 Near Futures Prices for Corn, Soybeans and Crude Oil Corn Crude oil (index) Soybean What happened in 8? 8 8 9, 8, Ave. Iowa farmland price ($ per acre) Ethanol production,, 7,,,,, 8,,,,,,,,

5 /8/ 9, 8, Ave. Iowa farmland price ($ per acre) Farm subsidies ($bil.) 7,,,,,,, With new era of prices comes new politics of U.S. Farm Bill Now includes environment (local air pollution; GHG emissions) and energy policy interests Direct payments became politically embarrassing Target prices/loan rates generate few subsidies & political desire to transfer $ to farmers in high/volatile price era Cuts are related to the CBO baseline and mandatory expenditures (not to current or recent expenditures) Crop insurance subsidies in recent years has become biggest spending category (~ $7 bil. total US crops) New revenue insurance subsidies could be big Rising opposition from high prices New interest groups include coalitions of livestock organizations such as various meat, livestock, poultry and dairy producer associations New margin protection policies for dairy

6 /8/ Central values for external costs of fuel consumption Environmental (Parry effects et al. JEL of 7) biofuel policies GHG savings small relative to mileage related externalities cents/gal Fuelrelated costs GHGs Oil dep. Mileagerelated costs Local pollution Congestion Accidents GHGs as a % of total:.8% Market leakages with biofuels Higher prices means supply response that includes land conversion and so GHG emissions More fuel supply so lower crude oil prices and higher consumption (biofuels replace only ½ of gallon of gasoline as a result) 7 Socioeconomic and rural development effects Biofuels a double edged sword in achieving improved farm income/rural development: taxes valueadded agriculture (e.g., livestock, dairy and poultry) that involve more farms and downstream employment Higher crop prices and employment from biofuel production probably results in a net reduction in economic growth in rural areas (compared to no biofuels) 8