Impact of US biofuel policy on US corn and gasoline price variability

Despite a large number of studies that examine the influence of biofuels and biofuel policy on commodity prices, the impact of biofuel policy on commodity price variability is poorly understood. A good understanding of biofuel policy’s impact on price variability is important for mitigating food insecurity and assisting policy formation. We examine how U.S. ethanol policies such as the Renewable Fuel Standard (RFS) mandates and the blend wall affect the price variability of corn and gasoline. We first present an analytical and graphical framework to identify the effect and then use stochastic partial equilibrium simulation to measure the magnitude of the impacts. We show that RFS mandates and the blend wall both reduce the price elasticity of demand for corn and gasoline and therefore increase the price variability when supply shocks occur to the markets. This has important implications for policy actions with respect to maintaining or changing the current RFS mandates and/or blend wall in the US.

► The RFS is found to lead to less elastic demand for corn and gasoline.
► Thus the RFS is also found to lead to more volatile corn and gasoline prices when supply shocks occur.
► The ethanol blend wall is found to lead to less elastic corn and gasoline demand.
► Thus the blend wall is also found to lead to more volatile corn and gasoline prices.