TY  - JOUR
AU  - Hertel, Thomas W
AU  - Beckman, Jayson
TI  - Commodity Price Volatility in the Biofuel Era: An Examination of the Linkage Between Energy and Agricultural Markets
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 16824
PY  - 2011
Y2  - February 2011
DO  - 10.3386/w16824
UR  - http://www.nber.org/papers/w16824
L1  - http://www.nber.org/papers/w16824.pdf
N1  - Author contact info:
Thomas Hertel
Department of Agricultural Economics
Purdue University
1145 Krannert Bldg.
West Lafayette, IN 47907
E-Mail: hertel@purdue.edu

Jayson Beckman
USDA Economic Research Service
Washington, DC
E-Mail: jbeckman@ers.usda.gov
M1  - published as Thomas W. Hertel, Jayson Beckman. "Commodity Price Volatility in the Biofuel Era: An Examination of the Linkage between Energy and Agricultural Markets," in Joshua S. Graff Zivin and Jeffrey M. Perloff, editors, "The Intended and Unintended Effects of U.S. Agricultural and Biotechnology Policies" University of Chicago Press (2012)

M3  - presented at "Agricultural Economics Conference", March 4-5, 2010
AB  - Agricultural and energy commodity prices have traditionally exhibited relatively low correlation. However, recent increases in biofuel production have altered the agriculture-energy relationship in a fundamental way. This increase has drawn on corn previously sold to other uses, as well as acreage devoted to other crops. The US RFS envisions a further boost of ethanol production to 15 billion gallons per year, which might be expected to further strengthen the linkages. We estimate that, in the presence of a binding RFS, the inherent volatility in the US coarse grains market will rise by about one-quarter. And the volatility of the US coarse grains price to supply side shocks in that market will rise by nearly one-half. 

Under a high oil price scenario, rather than the RFS binding, the binding constraint is likely to be the blend wall. With a binding blend wall, we see similar, although somewhat smaller, increases in market volatility. If both the RFS and the blend wall are on the verge of being binding, then our results suggest that US coarse grains price volatility in response to corn supply shocks would be 57% higher than in the non-binding case, and world price volatility would be boosted by 25%.
ER  -