1. Ravello June 2012 Meyer, Binfield and Thompson 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 Wyatt Thompson Julian Binfield Food and Agricultural Policy Research Institute University of Missouri, USA

2. Ravello June 2012 Meyer, Binfield and Thompson 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. Ravello June 2012 Meyer, Binfield and Thompson A Model of US Agriculture and Biofuel markets and policy Deterministic projections: 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.

4. Ravello June 2012 Meyer, Binfield and Thompson 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. Ravello June 2012 Meyer, Binfield and Thompson 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. Ravello June 2012 Meyer, Binfield and Thompson Yield effect on prices and returns (2021/22 crop year) maize farm pricemaize mkt. net-ret

7. Ravello June 2012 Meyer, Binfield and Thompson Mandate Policy SMSM DMDM QMQM PMPM *Simplification which excludes, among other things, wholesale to retail markup SMSM DMDM QMQM P PCPC Q Policy No PolicyMandates (RFS) RIN

8. Ravello June 2012 Meyer, Binfield and Thompson Growth of biofuel mandates RFS How do blenders show they complied? RINS

9. Ravello June 2012 Meyer, Binfield and Thompson Ethanol and Biodiesel Production (average 2017-2021) 59.7 billion liters maize ethanol

10. Ravello June 2012 Meyer, Binfield and Thompson Ethanol and Biodiesel Production (average 2017-2021) 53.7 billion liters maize ethanol 59.7 billion liters maize ethanol

11. Ravello June 2012 Meyer, Binfield and Thompson Ethanol and Biodiesel Use (average 2017-2021) 73.3 billion liters all ethanol

12. Ravello June 2012 Meyer, Binfield and Thompson Ethanol and Biodiesel Use (average 2017-2021) 53.3 billion liters all ethanol 73.3 billion liters all ethanol

13. Ravello June 2012 Meyer, Binfield and Thompson Effects of biofuel policies (2017-21 average of 500 stochastic outcomes) RFSNo Policy Ethanol production (bil. liters)69.0856.02-18.9% From Maize (bil. liters)59.6753.65-10.1% Ethanol consumption (bil. liters)73.3653.34-27.3% Maize yield (tons per ha)11.1711.15-0.2% Maize price ($ per ton)184.26174.42-5.3% Wheat price ($ per ton)222.67214.88-3.5% Soybean price ($ per ton)421.85393.24-6.8% Maize Production (mt)376.94370.84-1.6% Maize used for feed (mt)131.22137.214.6% Maize exports (mt)61.2263.523.8% Ethanol producer price (cents/liter)0.540.51-6.1% Ethanol consumer price (cents/liter)0.580.6816.2%

14. Ravello June 2012 Meyer, Binfield and Thompson Consumer demand and the blend wall Market segmented into involuntary, E10/E15 and E85 InvoluntaryE10/E15E85 P E /P G QEQE RFS No Policy

15. Ravello June 2012 Meyer, Binfield and Thompson Consumer demand and the blend wall Market segmented into involuntary, E10/E15 and E85 InvoluntaryE10/E15E85 P E /P G QEQE RFS No Policy

16. Ravello June 2012 Meyer, Binfield and Thompson Capacity and Utilization in Ethanol Dry-Mills

17. Ravello June 2012 Meyer, Binfield and Thompson Aggregate Effects of RFS Removal (2017-2021 average)

18. Ravello June 2012 Meyer, Binfield and Thompson Policy effect on maize price level and volatility (2021) * Maize farm price 2021 solutions

19. Ravello June 2012 Meyer, Binfield and Thompson National maize yields in 2021 under the baseline and under improved maize yields (bu/ac) NEGATIVE baseline yield deviations cut by 50%

20. Ravello June 2012 Meyer, Binfield and Thompson Effects of Yield improvement with RFS (2017-21 average of 500 stochastic outcomes) Absolute change% change Maize yield (tons per ha)0.161.4% Maize price ($ per ton)-4.96-2.7% Wheat price ($ per ton)-2.31-1.0% Soybean price ($ per ton)-3.20-0.8% Maize Production (mt)3.851.0% Maize used for feed (mt)1.751.3% Maize exports (mt)1.452.4% Ethanol production (mil. liters)1660.2% From Maize (mil. liters)2210.4% Ethanol consumption (mil. liters)330.0% Ethanol producer price (cents/liter)-.01-1.5% Ethanol consumer price (cents/liter)-.00-0.1%

21. Ravello June 2012 Meyer, Binfield and Thompson Effects of Yield improvement with RFS billions of dollars annually (2017-21 average of 500 stochastic outcomes) With RFSAbsolute change% change Net Farm Income-1.14-1.2% Net CC outlays-0.04-0.4% Biofuel policy consumer costs-0.54-2.6% US Food expenditures-0.1% No PolicyAbsolute change% change Net Farm Income-1.27-1.4% Net CC outlays-0.04-0.5% Biofuel policy consumer costsNA US Food expenditures-0.89-0.06%

22. Ravello June 2012 Meyer, Binfield and Thompson Effect on market net-returns (dollars per acre)

23. Ravello June 2012 Meyer, Binfield and Thompson Effect on market net-returns (dollars per acre)

24. Ravello June 2012 Meyer, Binfield and Thompson 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. Ravello June 2012 Meyer, Binfield and Thompson THANKS! To contact Seth Meyer (presentor): Seth.Meyer@fao.org Seth.Meyer@fao.org To contact Wyatt Thompson (co-author): ThompsonW@missouri.edu ThompsonW@missouri.edu To contact Julian Binfield (co-author): BinfieldJ@missouri.edu BinfieldJ@missouri.edu

26. Ravello June 2012 Meyer, Binfield and Thompson A slight detour Policy effect on biofuel trade

27. Ravello June 2012 Meyer, Binfield and Thompson Effects on farm prices (dollars per bushel)

28. Ravello June 2012 Meyer, Binfield and Thompson Effects on farm prices (dollars per bushel)

29. Ravello June 2012 Meyer, Binfield and Thompson Maize used for ethanol (million bushels)

30. Ravello June 2012 Meyer, Binfield and Thompson Maize used for ethanol (million bushels)

31. Ravello June 2012 Meyer, Binfield and Thompson 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. Ravello June 2012 Meyer, Binfield and Thompson 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. Ravello June 2012 Meyer, Binfield and Thompson Chart ideas Capacity and Capacity Utilization Maize ethanol net returns. E85 and E15 use