FAPRI Says Oil Major Factor in Commodity Prices

Tariffs and mandates have less impact than oil prices.

Published on: Jun 16, 2008

Tax credits, import tariffs and mandates on usage encourage increased production of biofuels, but so do rising oil prices and can have even larger effects on farm commodity prices than government biofuels policies, according to the University of Missouri Food and Agricultural Policy Research Institute.

The models run extensive "what-if" scenarios based on current policy from the recently passed farm bill and energy bill compared to proposed changes. FAPRI examined 13 scenarios, ranging from a pre-farm-bill scenario that keeps current policies in place to scenarios that eliminate biofuel tax credits, tariffs and use mandates.

"Mandates have little market impact when high petroleum prices contribute to high biofuel prices and production levels," said Pat Westhoff, FAPRI co-director. "On the other hand, mandates can be important when petroleum prices are low or crop supplies are reduced."

The 2008 farm bill extends a 54 cent per gallon tariff on imports of ethanol from non-Caribbean countries through 2010. That tariff was to expire at the end of this year. Continuing the tariff discourages imports, but does not have big impacts on biofuel production or farm commodity markets, FAPRI suggests.

Secondly, the farm bill cuts the tax credit from 54 cents to 45 cents per gallon for those who blend ethanol with gasoline. That credit is set to expire at end of 2010. The small change in the tax credit also has modest market impacts.

The most extreme scenario allows current tax credits and tariffs to expire as scheduled and would not enforce the energy bill mandates. In this scenario, without most current biofuel policies, corn prices would decline 14% on average compared to a scenario that continues current support measures.

The report, "Biofuels: Impact of Selected Farm Bill Provisions and other Biofuel Policy Options," can be seen at http://fapri.missouri.edu. The report was based on work under a contract with the United States Department of Agriculture's Economic Research Service. A new analysis including higher oil prices and new crop production estimates will be run this summer.

Source: Feedstuffs