The effect of biodiesel policies on world biodiesel and oilseed prices

- We analyze the effect of biodiesel policies and diesel prices on world oilseed markets.
- The effects of higher diesel prices depend on the binding biofuel policy.
- A higher diesel price increases the canola price but has an ambiguous effect on the soybean price.
- A diesel price shock under a mandate causes a smaller change in oilseed prices than under a tax exemption.

A theoretical and empirical model is developed to analyze the effect of a biodiesel mandate, a tax exemption (tax credit) and an exogenous diesel price shock on world soybean and canola markets. The jointness in crushing oil and meal from the oilseed reduces the size of the link between biodiesel and oilseed prices. A diesel price shock with a mandate results in a smaller change in oilseed prices compared with a tax exemption. Higher diesel prices increase biodiesel prices under a tax exemption but lower them with a blend mandate. When both canola and soybeans are used to produce biodiesel, an increase in the diesel price leads to higher canola prices, but the effect on soybean prices is ambiguous and depends on relative elasticities of meal demand and canola supply because canola produces more oil than soybeans.