Three essays concerning agriculture and energy

Abstract

This dissertation consists of three papers, each regarding a particular aspect of the relationship between energy and agriculture. The objective of the first paper is to create a model that will enhance informed policy decisions regarding the bioeconomy. A forward-looking stochastic model captures the effect of uncertainty in crude oil prices and commodity yields on biofuel industry development. Acreage limitations on feedstocks such as corn, soybeans, and switchgrass are shown to create competition for acreage among the crops. Investors in the model are rational in the sense that they engage in biofuel production only if returns exceed what they expect to earn from alternative investments.The Energy Independence and Security Act of 2007 mandates the use of 36 billion gallons of biofuels by 2022 with significant requirements for cellulosic biofuel and biodiesel production. In the model, the price wedge created by mandated biofuel production at these levels is $2.50 per gallon for biodiesel and $1.07 per gallon for cellulosic biofuel. Long-run commodity prices were high in our simulation, with corn at $7.38 per bushel and soybeans at $19.57 per bushel. Intense competition for planted acreage drives the high commodity prices.The second paper develops a model of the corn, soybean, and wheat markets to calculate welfare effects of increased biofuel production in the United States. Demand is disaggregated into livestock feed, food, energy. Uncertain crop yields permit the valuation of farm deficiency payments as options. Incorporating soybean and wheat markets capture indirect welfare effects through equilibrium price increases. Net welfare loss ranges from $200 million to $750 million depending on the size of biofuel increase. Consumers make a sizable transfer to farmers. The sign of the net costs to taxpayers depends on the size of the biofuel industry.In the third paper, the nature of the relationship between corn and ethanol prices is explored. Economic fundamentals should require that the price of corn and ethanol maintain a long run equilibrium relationship. The relationship is driven by a long run condition that says entry and exit in the industry will occur maintaining no sustained profits or losses for the industry. Both ethanol producers and traditional users of corn have a stake in the behavior of these markets, and their profitability will rely on their ability to determine accurately this relationship. I test for cointegration of these price series and find evidence that corn and ethanol prices are indeed maintain an equilibrium relationship.Statistical cointegration tests are known to have problems in small samples. This is a potential issue in interpreting the results mentioned above because ethanol production only recently constituted a significant portion of the corn crop. With only a few years of the most recent data for which we suspect that an equilibrium relationship existed the small sample properties of cointegration tests are important particularly in this application. A Monte Carlo study tailored to mimic our actual data set is conducted. I find that the corn and ethanol price series are not long enough to rely on the asymptotic properties of the cointegration statistics, and therefore one should use small sample critical values in this kind of analysis.