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GTAP Resource #3627

"Implications of Climate Volatility for Agricultural Commodity Markets in the Presence of Biofuel Mandates"
by Hertel, Thomas and Noah Diffenbaugh

Over the past decade, agricultural and energy commodity markets have become increasingly intertwined. For example, the amount of corn utilized for ethanol production in the US has increased from 5% in 2001 to nearly one-third. Over the next five years, the US Renewable Fuels Standard (RFS) envisions a further boost of ethanol production to 15 billion gallons per year. This might be expected to further strengthen the linkage between energy prices and agricultural commodity markets. However, absent a sharp rise in oil prices, it is likely that the RFS will be binding in 2015 – that is, the amount of ethanol consumed will be determined by government mandates rather than by the relative price of oil vs. corn-based ethanol. Under such a scenario, with an even larger share of corn production going to ethanol, and with that source of demand potentially becoming unresponsive to price, there is potential for significant increases in agriculture commodity market volatility. Indeed, Hertel and Beckman (2010) have estimated 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. This is of great concern since increased yield variability due to climate change is expected to translate into increased corn supply-side volatility and hence increased commodity price volatility, holding all else constant. Of course, the impact of such supply side volatility will depend critically on the nature of US biofuel mandates and potential market constraints (such as the blend wall). These will, in turn, depend on the level of oil prices in the future. Under a low oil price regime, with a binding mandates and blend wall, this additional volatility could have dramatic consequences for agricultural commodity markets.

Resource Details (Export Citation) GTAP Keywords
Category: 2011 Conference Paper
Status: Published
By/In: Presented at the 14th Annual Conference on Global Economic Analysis, Venice, Italy
Date: 2011
Version: 1
Created: Hertel, T. (4/15/2011)
Updated: Hertel, T. (4/15/2011)
Visits: 1,930
- Climate change policy
- Baseline development

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Comments (1 posted)
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Posted by: Hertel, Thomas   4/15/2011 12:45:00 PM
Incomplete draft... awaiting revision of baseline and addition of climate change results