The impact of biofuel policies on the Brazilian dairy sector

Abstract

Brazil is the fourth largest country in milk production and both production and consumption of dairy products are growing fast. However, it is unknown how the dairy sector reacts to exogenous shocks. A structural econometric model of the Brazilian dairy sector is used to analyze the consequences of biofuel policies on the production, consumption, and price of milk. The paper aims to evaluate how the Renewable Fuel Standard policy in the U.S. and the sugar cane policy in Brazil affect the dairy industry in Brazil. The policies are analyzed relative to a ten-year baseline scenario ending in 2022. Data from 1980 to 2012 are used to estimate the Brazilian dairy sector model. Annual equilibrium prices are solved by minimizing the squared difference between supply and demand for four different markets: cheese, butter, milk powder, and fresh dairy products. Both RFS and sugar cane acreage expansion have negative impact on milk production in Brazil and positive effect on consumer price. However, the impact of US’ RFS program is small. The model estimates appear to perform well in representing the actual dairy sector. The milk production forecasts were reasonable and the effects of shocks were well supported by the economic theory.