Identifying Supply and Demand Elasticities of Agricultural Commodities: Implications for the Us Ethanol Mandate

48 Pages Posted: 26 Apr 2010 Last revised: 22 Mar 2015

See all articles by Michael J. Roberts

Michael J. Roberts

North Carolina State University - Department of Agricultural & Resource Economics

Wolfram Schlenker

Columbia University - School of International & Public Affairs (SIPA)

Date Written: April 2010

Abstract

We present a new framework to identify demand and supply elasticities of agricultural commodities using yield shocks - deviations from a time trend of output per area, which are predominantly caused by weather fluctuations. Demand is identified using current-period shocks that give rise to exogenous shifts in supply. Supply is identified using past shocks, which affect expected future prices through inventory accretion or depletion. We use our estimated elasticities to evaluate the impact of ethanol subsidies and mandates on world food commodity prices, quantities, and food consumers' surplus. The current US ethanol mandate requires that about 5 percent of world caloric production from corn, wheat, rice, and soybeans be used for ethanol generation. As a result, world food prices are predicted to increase by about 30 percent and global consumer surplus from food consumption is predicted to decrease by 155 billion dollars annually. If a third of the biofuel calories are recycled as feed stock for livestock, the predicted price increase scales back to 20 percent. While commodity demand is extremely inelastic, price response is muted by a significant supply response that is obscured if futures prices are not instrumented. The resulting expansion of agricultural growing area potentially offsets the CO2 emission benefits from biofuels.

Suggested Citation

Roberts, Michael J. and Schlenker, Wolfram, Identifying Supply and Demand Elasticities of Agricultural Commodities: Implications for the Us Ethanol Mandate (April 2010). NBER Working Paper No. w15921. Available at SSRN: https://ssrn.com/abstract=1594555

Michael J. Roberts (Contact Author)

North Carolina State University - Department of Agricultural & Resource Economics ( email )

Box 8109
3332 Nelson Hall
Raleigh, NC 27695-8109
United States
(919) 513-8060 (Phone)
(919) 515-1824 (Fax)

HOME PAGE: http://www4.ncsu.edu/~mjrober2/main/Home.html

Wolfram Schlenker

Columbia University - School of International & Public Affairs (SIPA) ( email )

420 West 118th Street
New York, NY 10027
United States
2128541806 (Phone)

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