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Commodity Price Volatility in the Biofuel Era: An Examination of the Linkage between Energy and Agricultural Markets

Commodity Price Volatility in the Biofuel Era: An Examination of the Linkage between Energy and Agricultural Markets

Chapter:
(p.189) 6 Commodity Price Volatility in the Biofuel Era: An Examination of the Linkage between Energy and Agricultural Markets
Source:
The Intended and Unintended Effects of U.S. Agricultural and Biotechnology Policies
Author(s):
Thomas W. HertelJayson Beckman
Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226988061.003.0007

The relationship between agricultural and energy commodity markets has strengthened significantly with the recent increase in biofuel production. Energy has always played an important role in agricultural production inputs; however, the combination of recent high energy prices with policies aimed at promoting energy security and renewable fuel use have stimulated the use of crop feedstock in biofuel production. With a mandate to further increase biofuel production in the United States, it is clear that the relationship among agricultural and energy commodities may grow even stronger. This chapter indicates that the era of rapid biofuel production strengthened the transmission of energy price volatility into agricultural commodity price variation. The additional mandated production has the potential to further strengthen this transmission. However, the outcome will depend critically on the policy regime in which ethanol markets find themselves. The presence of a Renewable Fuels Standard can hinder the ethanol's sector's ability to react to low oil prices, thereby destabilizing commodity markets. The presence of a liquid fuels blend wall causes a similar disconnection in the transmission of energy prices to agriculture—albeit at high oil prices—and, therefore, also serves to increase commodity price volatility.

Keywords:   biofuel, greenhouse gas, Renewable Fuels Standard, European Union, biofuel era, commodity price

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