FAPRI: Oil Prices Affect Commodity Prices More than Biofuels Mandates

06:42PM Jun 16, 2008
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While biofuels mandates and tax credits can impact commodity prices, the price of oil can have an even greater impact, according to a study released by the Food and Agricultural Policy Research Institute (FAPRI).

Tax credits, import tariffs and mandates on usage encourage increased production of biofuels, but so do rising oil prices, the group noted in the study -- Biofuels: Impact of Selected Farm Bill Provisions and other Biofuel Policy Options -- which looks at 500 random draws of possible weather, production and other market influences.

"The impact of biofuel policies depends not just on the policy but very much on the market context," said Pat Westhoff, FAPRI co-director. "Mandates have little market impact when high petroleum prices contribute to high biofuel prices and production levels. On the other hand, mandates can be important when petroleum prices are low or crop supplies are reduced."

The 2008 farm bill extends a 54 cent per gallon tariff on imports of ethanol from non-Caribbean countries through 2010. That tariff was to expire at the end of this year. Secondly, the farm bill cuts the tax credit from 54 cents to 45 cents per gallon for those who blend ethanol with gasoline. That credit is set to expire at end of 2010. Continuing the tariff discourages imports, but does not have big impacts on biofuel production or farm commodity markets, FAPRI suggests. The small change in the tax credit also has modest market impacts. The most extreme scenario allows current tax credits and tariffs to expire as scheduled and would not enforce the energy bill mandates.

In this scenario, without most current biofuel policies, corn prices would decline 14% on average compared to a scenario that continues current support measures.

"The work reflects the views of the authors and not necessarily the view of the USDA," Westhoff said. The FAPRI model required extensive modifications in reaction to changes in energy costs and biofuel use, Westhoff said. "While the model was improved, further refinements are underway. What we learned in this exercise will improve the model." A new analysis including higher oil prices and new crop production estimates will be run this summer. 

Here's a link to read the entire report.