Farm Acreage Shocks and Crop Prices: An SVAR Approach to Understanding the Impacts of Biofuels

Abstract

The last 10 years have seen tremendous expansion in biofuels production, particularly in corn ethanol in the United States, at the same time that commodity prices (e. g., corn) have experienced significant spikes. While supporters claim that biofuels are renewable and carbon-friendly, concerns have been raised about their impacts on land use and food prices. This paper analyzes how US crop prices have responded to shocks in acreage supply; these shocks can be thought of as a shock to the residual supply of corn for food. Using a structural vector auto-regression framework, we examine shocks to a crop's own acreage and to total cropland. This allows us to estimate the effect of dedicating cropland or non-crop farmlands to biofuels feedstock production. A negative shock in own acreage leads to an increase in price for soybeans and corn. Our calculations show that increased corn ethanol production during the boom production year 2006/2007 explains approximately 27% of the experienced corn price rise. © 2012 Springer Science+Business Media B.V.