Application Of The Competitive Storage Model To Us Corn Ethanol Policy

Abstract

Biofuel policies in the United States were adopted to reduce dependence on crude oil, boost farm incomes, and benefit the environment. However, recent literature has focused on the negative effects of biofuels on crop and food markets in terms of increasing price levels and volatility. Corn ethanol policy in the United States has created new price linkages between the corn, ethanol, and gasoline markets. Grain storage has the ability to mitigate price volatility. Thus, a better understanding of grain storage in the new environment of biofuels is warranted. The competitive grain storage model is extended to include these linkages. Four policies are considered: no policy, an ethanol consumption mandate, an excise tax credit, and both a mandate and tax credit together. The results show that the application of biofuel policy increases the expected price of corn and increases the amount of corn stored.