Impacts of Energy Price and Ethanol Demand Shocks on U.S. Agriculture: A Partial Equilibrium Approach

Impacts of Energy Price and Ethanol Demand Shocks on U.S. Agriculture: A Partial Equilibrium Approach

A paper by Thriving Ag Project Task 13 team members, Chenyang Hu, Darrell Bosch, and Wei Zhang at Virginia Tech was accepted for presentation at the Southern Agricultural Economics Association Annual Meeting in February 2022. Chenyang Hu's presentation at the SAEA Annual Meeting was titled, "Impacts of Energy Price and Ethanol Demand Shocks on U.S. Agriculture: A Partial Equilibrium Approach". A description of the presentation is provided below.

Agriculture is an energy-intensive industry while energy prices are likely to increase in the coming decade. We try to examine the implications of energy price and ethanol demand shocks for revenues, prices, and output from the U.S. agriculture sector. We examine the effects of energy price and ethanol demand shocks using the REAP (Regional Environment and Agriculture Programming) model, a partial equilibrium model implemented using nonlinear mathematical programming. Four scenarios are simulated in our research. Scenario 1 assumes a constant ethanol market while energy costs increased by 10%, 20%, and 30%, representatively. Scenario 2 assumes ethanol domestic consumption still faces the 10% ‘blend wall’ but ethanol export doubles. Scenario 3 assumes ethanol domestic consumption faces the mid-level 20% ‘blend wall’ and ethanol export doubles. Scenario 4 assumes ethanol domestic consumption faces the mid-level 20% ‘blend wall’ and ethanol export quadruples.

The major results in Scenario 1 are: 1) higher energy prices lead to higher crop prices and lower crop output and lower livestock production; 2) crop acres decrease in most farm regions with the exception of Northern Plains and Lake States. The major results in Scenario 2, 3, and 4 are: 1) higher ethanol demand (both domestic and export) leads to expansion of corn production but reduction of minor feed grains production (sorghum, barley, and oats); 2) livestock production tends to increase in response to higher ethanol demand due to the increased availability of by-products used for animal feed; 3) crop output increases the most in Corn Belt which has large shares of corn.

You can find out more about the REAP model and the Task 13 team's research here.