Abstract
AbstractThis article examines the impact of the 2012 drought and the biofuels mandate on the U.S. grain and livestock markets and estimates the mandate waiver required to offset the impact on the corn price. The framework used is a stochastic equilibrium displacement model that integrates the beef, pork, and poultry markets with the corn, distillers’ grain, soybean, soymeal, and ethanol markets. The corn and beef markets are found to be the most vulnerable. A mandate waiver of approximately 23% is required to fully negate the impact of the drought on corn prices. The waiver is equivalent to a 13.7% reduction in ethanol consumption.
Highlights
The onset of the 2012 drought raised concerns from the livestock sector about the effects of biofuels policies on feed costs, corn and soybean prices
Thompson et al (2012) examine the impacts of the full mandate waiver. Their results are in line with Irwin and Good’s (2012) findings in that a mandate waiver would have a minimal effect in reducing ethanol production and little impact on corn prices
Because the Environmental Protection Agency (EPA) did not waive the Renewable Fuel Standard (RFS) mandate target for 2012, the only flexibility ethanol blenders have in blending ethanol is the use of Renewable Fuel Identification Numbers (RINs) credits
Summary
The onset of the 2012 drought raised concerns from the livestock sector about the effects of biofuels policies on feed costs, corn and soybean prices. The U.S government is likely to adjust biofuel mandates based on grain supply and environmental situation.3 Given these facts, we use a stochastic equilibrium displacement model (SEDM) to (1) measure the impacts of the RFS mandate on the livestock industry in the presence of a drought-induced crop and pasture shortfall, using the 2012 drought as a case study, and (2) to estimate the degree that the mandate would have to be waived to fully offset the impact of drought on the price of corn. We use a stochastic equilibrium displacement model (SEDM) to (1) measure the impacts of the RFS mandate on the livestock industry in the presence of a drought-induced crop and pasture shortfall, using the 2012 drought as a case study, and (2) to estimate the degree that the mandate would have to be waived to fully offset the impact of drought on the price of corn The answers to these questions are crucial in assessing the effectiveness of a mandate waiver. In the United States, typically 10% of final blended gasoline volume is ethanol.
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