biofuel, Agricultural and Food Policy, Demand and Price Analysis, International Relations/Trade,

Fridfinnson, Brooke

Rude, James

English

Research Papers in Economics

 
 
 
THE EFFECTS OF BIOFUELS 
POLICIES ON GLOBAL 
COMMODITY TRADE FLOWS 
 
 
CATPRN Trade Policy Brief 2009-01 
April 2009 
 
 
 
Brooke Fridfinnson 
Graduate Research Assistant 
Department of Agribusiness and Agricultural Economics 
University of Manitoba 
 
 
James Rude 
Associate Professor 
Department of Rural Economy 
University of Alberta 
 
 
 
http://www.catrade.org 
 
Trade Policy Briefs are short summaries of studies funded by the CATPRN.  As such, the briefs 
omit many of the details and all of the references contained in the longer reports.  This brief is 
based on CATPRN Commissioned Paper 2009-01.  The CATPRN is funded by Agriculture and 
Agri-Food Canada but the views expressed in this paper are those of the authors and should not 
be attributed to the funding agency.     2
BACKGROUND 
 
In the later part of the past decade, biofuels have become associated with an 
overwhelming number of policy issues. The ability of biofuels to meet their purported 
policy goals has been both hailed and criticized, with experts on both sides of the debate 
weighing in.  
 
Biofuels, transportation fuels currently produced from biological (primarily agricultural) 
sources, have been increasing in both production and consumption worldwide. Ethanol 
and biodiesel are currently the most prevalent “first-generation” biofuels in terms of 
wide-scale commercial use. Both are most commonly used as low-level blends with 
regular gasoline or diesel, with the exception of ethanol in Brazil, where consumers are 
able to fill up their modified engines with E100 (100 percent ethanol). It should also be 
noted that vehicles with flex-fuel technology are becoming more popular in the US, and 
allow drivers to choose between low-level ethanol blends such as E5 (5 percent ethanol, 
95 percent gasoline) and higher blends such as E85. The efficacy of this technology 
depends on the availability of fuel stations supplying E85; in the US, this number is 
roughly 1200, while only two Canadian fuel stations have E85 publicly available.  
 
While ethanol production is dominated by the United States (US) and Brazil, the rest of 
the world is also increasing production capacity and with it demand. As of January 2008, 
production capacity in the US had increased to roughly 27 billion litres of corn-based 
ethanol per year, relative to an estimated 2006 Brazilian capacity of 17 billion litres of 
sugarcane-based ethanol. Ethanol is also the main biofuel in Canada, with production of 
roughly 580 million litres in 2007. The feedstock used in Canadian ethanol production is 
also primarily corn, although about 30 percent, mainly in Western Canada, is produced 
from wheat. Ethanol production in the European Union (EU) is not as widespread, 
although it is significant, estimated at 1,592 million litres in 2006. Germany, Spain and 
France are the three highest producing countries, utilizing feedstocks ranging from sugar 
beets to wheat to wine. 
 
Biodiesel is currently the more significant biofuel in the EU, with 2006 production in the 
range of 3.6 billion litres. Production is relatively concentrated, with Germany, Italy and 
France retaining roughly 63 percent of total EU biodiesel production capacity. Rapeseed 
oil is the common input in Northern Europe, while sunflower oil and waste oil are more 
common in Southern Europe. The biodiesel industries in Canada and the US are growing 
rapidly, with expected construction and expansion projects bringing canola and waste-
based biodiesel capacity in Canada to roughly 325 million litres per year in the 
foreseeable future. American capacity numbers from 2006 suggest a projected capacity of 
nearly one billion litres per year of biodiesel moving forward.  
 
BIOFUELS POLICIES AND MOTIVATIONS 
 
Commonly, biofuels policies are designed to stimulate both domestic consumption and 
production, often as a response to issues in several policy areas. Government 
administrations pursue biofuel policies to address concerns as varied as rural   3
development and national energy security, while issues regarding the environment and 
the demands of agricultural lobbyists are also factored into policy actions.  
 
Government tactics to boost domestic production and consumption come in many forms, 
including consumption mandates, import tariffs, excise tax exemptions and assistance 
with capital construction and/or expansion costs. The EU has also incorporated 
consumption mandates into its biofuels strategy, striving for a 2 percent share of 
transportation fuel to be replaced with renewable fuels in 2005 and a 5.75 percent share 
in 2010. By 2005, this target was not met, and the European Commission has stated that 
it is unlikely that the 2010 goals will be ratified. Perhaps most notably in terms of border 
measures, the US imposes a 54 cents per gallon import tariff on ethanol entering the 
country, as well as a 2.5 percent ad valorem tariff, although there have been indications 
that the first tariff may not be permanent. With respect to excise tax exemptions, the 
Government of Canada exempts fuels blended with renewable content from federal 
excise taxes; this amounts to 10 cents per litre applicable to petroleum fuel and 4 cents 
per litre on diesel fuel. Also through the federal government, Natural Resources Canada 
has funded two rounds of the Ethanol Expansion Program to provide long-term capital 
loans to biofuel producers, and more recently announced significant funding through the 
NextGen Biofuels Fund, designed to support the development and construction of 
cellulosic or “second generation” biofuels. 
 
PRICE AND TRADE IMPACTS 
 
This study looks at the price and trade effects of the biofuels boom on agricultural 
commodities, including those that serve as the inputs for the production process. Using 
AGLINK, the multi-region, multi-commodity dynamic partial equilibrium model 
maintained by the OECD and its member countries, the effects of increased demand for 
commodities due to the biofuel production was analyzed. Given that ethanol production 
was modeled for Canada and the US, and biodiesel production was modeled for Canada, 
the US and the EU, the direct impact of biofuels was analyzed for coarse grains (corn, 
barley, rye, oats and sorghum), wheat and vegetable oil. The projection period was from 
2005 to 2015.  
 
The direct impacts of biofuels policies are simulated by first constructing a baseline 
scenario with no biofuel demand included, and then “shocking” the model to include 
biofuel demand.  A comparison of the two scenarios provides supply, demand, trade and 
price impacts resulting from biofuel demand over the 2005 to 2015 projection period.  
For corn, the average relative increase in price over the baseline was roughly 45 percent, 
while wheat markets showed smaller increases at 9 percent. Vegetable oil prices reached 
a high of 24 percent over the baseline in 2008, with an average increase of 17 percent. 
For the three commodities mentioned, increases were seen in the initial three or four 
years of the ten-year projection period, with more of a converging trend between the 
price path and the baseline as the period ended.  
 
The implications of these numbers are not only significant for grain farmers, but also for 
livestock producers and the ethanol production companies themselves. While grain   4
farmers may see increases in their gross revenue, the prices of many energy-based inputs 
are increasing as well. Recent numbers out of both Canada and the US suggest that the 
gains from high commodity prices are being capitalized into agricultural land values, 
both cropland as well as land more suitable for pasture. Higher grain prices also mean 
higher feed costs for livestock producers. Results from this analysis show that Canadian 
livestock producers in general, face an average increase of 28 percent for total wheat, 
coarse grains and oilseed meal feed expenditures over the projection period. These 
numbers, as well as the increases in pork and beef market prices seen in the analysis (12 
percent and 6 percent, respectively), suggest that contraction occurs in Canadian hog and 
cattle herds. As grain prices increase, margins on ethanol production also become tighter. 
Reports out of the US confirm that some plants are closing their doors, and other planned 
construction is being put on hold.  
 
Aside from the price impacts, the sheer amount of feedstock being fed into biofuels 
production leads to questions about the effects on world-wide grain trade. From this 
analysis, the net trade (the difference between exports and imports of a specific 
commodity for a certain country) impacts for several commodities were determined on a 
per country basis. In the US, coarse grains exports declined by 62 percent, due to the 
sheer amount of corn going directly into ethanol production. Beef and veal exports of 
meat, as well as live animals, also decreased by about 13 percent. Oilseed exports in 
Canada fell by about 6 percent, with slightly larger numbers estimated for the US. This is 
partially due to the emerging biodiesel industry, but more likely is a result of producer 
crop rotation decisions, as increasing amounts of land are switched into corn and away 
from soybeans. Canadian net trade in wheat also dropped by about 14 percent. In the 
EU25, coarse grain exports fell by roughly 8 percent, accompanied by a fall in beef 
exports by about 16 percent. European oilseed imports remained fairly constant relative 
to the baseline; however, in Canada, net trade in oilseeds declined by 7 percent. Producer 
prices for pork and beef in Canada also increased by 12 percent and 6 percent, 
respectively.  
 
These results are based on a significant amount of distillers grains (a by-product of 
ethanol production) being fed back into the feed market, as these by-products are able to 
substitute for the energy and protein components of livestock rations. For dairy cattle, 
beef cattle, pork and poultry, the substitutability of distillers grains for corn and soy meal 
(energy and protein) varies. It should be noted that our results are based on ambitious 
substitutability assumptions of distillers grains. Future work will vary these assumptions 
to provide a sensitivity analysis around the results.  
 
WTO IMPLICATIONS 
 
Due to both ambitious consumption mandates being set world-wide and the inability of 
many countries to domestically source feedstock to produce these biofuels, it is expected 
that trade in biofuels will continue to increase. As of 2006, Brazil is the most significant 
exporter of ethanol, shipping to countries as diversified as the US, Sweden and Japan. 
This raises questions as to how biofuels fall into the framework of the organizations 
overseeing international trade. Under the structure of the World Trade Organization,   5
biofuels could potentially fall under agricultural, industrial, or even environmental goods. 
This distinction is significant for their inclusion in various types of negotiations, and 
ultimately, to the level of bound tariffs member countries can apply. Currently, ethanol is 
considered an agricultural good, although imports for industrial purposes and for fuel use 
are indistinguishable. Biodiesel is classified as an industrial good; however, future 
biofuels, particularly those from non-agricultural sources need a better defined method 
for incorporation into the existing WTO framework.  
 
In most cases, large-scale biofuel production is both highly subsidized and heavily 
protected with border measures to prevent imports. However, once imports do enter, any 
national or state-level measures to promote the consumption of locally-sourced biofuel or 
biofuel feedstocks, would violate the principle of national treatment, in that imports be 
treated equivalently to the same goods produced in-country. Those with a vested interest 
in ensuring this principle is upheld are biofuel producers in tropical areas capable of 
producing renewable fuels with low-cost labour and cheaper, more effective feedstocks. 
These producers are often in developing countries and would also benefit from reduced 
government support for domestic production in developed countries, as well as from 
liberalization in the form of reduced border measures. 
 
CONCLUSIONS 
 
The biofuels industry affects and is affected by government policies in countries around 
the globe. Government involvement takes many forms, most of which are intended to 
stimulate domestic production and create a fixed demand for bio-blended fuels. 
Regardless of whether government intervention involves consumption mandates, excise 
tax exemptions or subsidized capital loans, the motivations behind biofuels are influenced 
by policy-makers in many areas including, but not limited to energy, agriculture, the 
environment and rural development. This analysis shows conservative impacts of 
biofuels consumption on the prices of grains and oilseeds, as well as livestock. 
 
Ambitious consumption mandates in developed countries, and increasingly, in 
developing ones as well, are bringing forth the need to incorporate a politically-complex 
product into an existing system of trade laws and principles based on liberalization. It 
also illustrates the need to anticipate the arrival of second generation biofuels and to be 
able to create distinguishable classifications within the current framework. 

The Effects of Biofuels Policies on Global Commodity Trade Flows

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics