Biofuels, Price Increases, andLand Use*

Peter BerckUniv. Calif. Berkeley

*I thank, without implicating, Max Auffhammer, Catie Hausman, Sarah Lewis, and Lunyu Xie.

Crop Utilization for Biofuels Has Gone UP

US Ethanol Production: Millions of Gallons

1998 2000 2002 2004 2006 2008 2010 20120

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Perspective

• Record ethanol production (written in ’08/’09) drove the year-to-year increase for total FSI (including ethanol) use.

• Estimated corn use for ethanol was 3,677 million bushels, up 628 million from the previous year.

• And it went up more from there.

Ag. Prices Have Gone UP

See the near doubling of the real prices of corn and soy? Whoever did this committed a crime against humanity.

Even with the recent run up, foodhas never been cheaper.

Crop Land Has Gone UP

1960-2009 Percent of Land in CropsDoesn’t look like a big biofuel bump…

0 10 20 30 40 50 600

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Brazil BRASub-Saharan Africa (all income levels) SSFArgentina ARG

Bigger picture

0 10 20 30 40 50 600

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Brazil BRASub-Saharan Africa (all income levels) SSFNorth America NACArgentina ARGSouth Asia SASWorld WLD

World—fractionally downAsia-sameNorth America, way down with a blip

Therefore Biofuels CAUSED High Prices and More Crop Land

Not so fast….• Clearly there is more work to be done here.• Comment: Most of what is going on in the

world crop economy was going on before and after biofuels. Higher yields is the big story. Higher demand is the emerging story. But neither of these is the biofuel story.

Getting some pretty direct evidence from the data

• The usual method is to specify supply and demand for everything in the world. Or just all the worlds crops. Put this in a model.

• Ask your model, suppose some land went off and grew biofuels instead.

• Model will give answer that depends upon elasticities of supply and demand and everything else in the model

Alternative

• Truly Tiny Models.– Step 1. from land to price. A regression.– Step 2. from price to land. Another regression

Step 1: Pin the Price Rise on the Ethanol

• We use US data to find the relations among US cropland and prices– We account for everything else on the planet, too.

Data

• US production of corn and soy• Yearly from 1956-2007• Farmland, cropland, farmgate crop prices,

futures crop prices• Input prices, foreign production, loan rates

We regress a bunch of these variables on their lags

• And use the structure, e.g. that acreage decisions are based on spring futures prices to find the relationships among the variables.

• Technically this is an SVAR (see Auffhammer, Berck, Hausman for details)

Variables: cut down model

corn futuressoy futures

corn acreagecorn harvest pricesoy harvest price

ty

To Estimate a system that looks like

1 1t t t tAy A y Cx

Here A and A1 are matrices; A has lots of zeros but that is a longer story. C is also a matrix. These are all matrices of coefficients. In this example they are 5x5 because there are 5 variables in Y and therefore 5 equations. X are things like input prices.The e we leave to an econometrics class.We use the data to find the values of the A’s and C.

Now we simulate.

• We see what our system says prices will be with the existing corn acreage. We take this years acreage and ask what will be next years prices

• Now we do it again with less acreage. We take this years acreage, less a million acres, and ask what next years prices will be.

• The change in price / change in acres is how much prices go up when acres devoted to food go down.

And what do we find?

Shock to Food Acreage

Results

• $0.04 to $0.07 increase in corn price for every 1 million corn acre shock– From 2006 to 2007, acreage of corn going to

ethanol increased by 6 million– Price increased $0.80– Then 30 to 50% of the price increase is explained

by 2007 ethanol production, in our model• Soybean prices also increase.•

Step 2: Look where the Light IS: Brazil

Hausman: Brazil

• soy spot price doubles, – soy acreage increases 26 percent nationally.

• soybean futures doubles, – soy acreage increases 63

• This increase is higher in regions of ecological importance;

• soy spot and futures prices double, – soy acreage increases 390 percent in the Center-West and – 320 percent along the border of the Amazon.

Rough Calculation

• 1/3 of price increase from biofuels• Price went from about $5 to about $10• So 1/3 of a double• So about 30% acreage increase in Brazil, if the

price increase were permanent• About 9% if temporary.

Lessons

• So far, the big driver of world land use is not biofuel.

• The place not to look for a difference is where cropland is already pretty well maxed out (south asia, US)

• Biofuel does make a difference. The place to look for the difference is the place where cropland is expanding anyway. Brazil. Measureable land change does come from use for biofuel

Addenda

• The research project known as EBI seeks to get more biofuel per acre.

• Biofuel requirements held constant, discovery lowers price and land use.