Working Paper: NBER ID: w15921
Authors: Michael J. Roberts; Wolfram Schlenker
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.
Keywords: Ethanol; Agricultural Commodities; Supply Elasticities; Demand Elasticities
JEL Codes: D61; Q11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| yield shocks (E43) | demand elasticities (D12) |
| yield shocks (E43) | supply elasticities (H30) |
| current-period yield shocks (E43) | exogenous shifts in supply (J20) |
| past yield shocks (Q11) | expected future prices (G13) |
| US ethanol mandate (Q42) | world food prices (Q11) |
| expanding agricultural land area (Q15) | supply response (J20) |
| one-third of biofuel calories recycled as feedstock (Q42) | price increase scaling back (E31) |
| increase in food prices (Q11) | annual loss in consumer surplus (D11) |
| ethanol policy (Q42) | food price increases (Q11) |
| food price increases (Q11) | exacerbation of civil conflicts (D74) |