The Role of Biofuel Policy and Biotechnology in the Development of the Ethanol Industry in the United States

Debate in the United States over biofuel policy intensifies as rising biofuel use mandates require more advanced cellulosic biofuels that cost more than conventional, corn-starch ethanol, leading to higher mandate compliance costs. For example, during the Senate debate about the Farm Bill in the summer of 2012, three amendments (SA 2267, SA 2283, and SA 2338) were proposed that would end the Renewable Fuel Standard (RFS2), which establishes these mandates. These efforts reflect a broader movement that is concerned with the impact of mandates on food prices, feed prices, and consumer and taxpayer costs. Questions about the RFS2 have intensified as drought settled on key corn-growing regions in the United States during Summer 2012. The impact of the mandates on these variables is not straightforward, however, and this article uses economic analysis to examine the effect of mandates on the evolution of the agriculture and biofuel sector. The impact of a different technology for maize that limits negative maize yield shocks is simulated to illustrate this complexity. This exercise is stylized, but relevant to current events and future decisions. If in the future droughtresistant maize seed biotechnologies are developed and adopted in the United States, then the impacts on maize markets and producer returns depend in part on how biofuel mandates affect overall demand for maize. Quantitative economic analysis using models is a useful tool to avoid simplifying complicated interactions, or even ignoring them. For example, during the food-versus-fuel debate as it played out in popular press, it was suggested that US biofuel policy bore sole responsibility for the increasing volumes of maize and vegetable oil feedstocks diverted to biofuel production in the period leading up to and including the 2005-2008 spike in agricultural commodity prices. This argument did not match well with more scientific assessments that highlighted the role of rising petroleum prices and the phasing out of methyl tertiary butyl ether as a fuel additive (Westhoff, Thompson, Kruse, & Meyer, 2007), nor the widespread view that petroleum prices could drive maize price (Tyner & Taheripour, 2008). More generally, the attribution of the price spikes to biofuels as the single cause—let alone biofuel policies in isolation—has been invalidated as overly simplistic; additional attribution has been provided to a number of other factors (Abbott, Hurt, & Tyner, 2008, 2009; Dewbre, Giner, Thompson, & von Lampe, 2008; European Commission, Directorate-General for Agriculture and Rural Development [EC], 2008; Food and Agriculture Organization of the United Nations [FAO], 2008; International Food Policy Research Institute (IFPRI), 2007; Meyers & Meyer, 2008; Organisation for Economic Co-operation and Development [OECD-FAO], 2008, 2010; US Department of Agriculture [USDA], Economic Research Service [ERS], 2008; World Bank, 2008; Westhoff, 2010). Transient factors, such as regional yield shortfalls and export controls, along with surging energy prices, changes in policy-induced grain stocks, and population and income growth, are cited as other Seth Meyer Agricultural Development Economics Division, Food and Agriculture Organization of the United Nations