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U.S. Agricultural Policy and Energy
Andrew Schmitz, Charles B. Moss,
and Troy G. Schmitz
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Consumer and Producer Choice of Ethanol and Gasoline
,M y U x
2x
1x
Gasoline
21
1
w kw
22
1
w kw
0x ab
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Ethanol Market
0Rp
0Dp
1p
D D D
0x 1x
S
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Structural of Agricultural Policy
Loan Rate
Target Price
*q*85% q
LRp*Cp Consumer Price
TDExportD
Loan Deficiency Payment
Countercyclical PaymentTPp
a
b c
d
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Effect of Ethanol
LRp
TPp
S
0p
1p
CountercyclicalPayments
Loan DeficiencyPayment
EtD
TD
T EtD D
EtD
T EtD D
eD dD
c
d
hq sqsq
hk
tq
lmn
o
2p
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Changes in Level and Consumption of Corn Supply and Demand
0.4 0.5 0.6 0.7Corn Price ($/bu.) 2.06 2.05 2.04 2.03Total Demand 9,677.39 9,694.31 9,707.53 9,718.15Food/Alcohol/Industrial 2,014.47 2,015.93 2,017.06 2,017.97Feed/Residual Use 5,748.25 5,762.46 5,773.58 5,782.50Exports 1,894.35 1,895.62 1,896.62 1,897.42CCP Payments (million $)
4,580.46 4,665.04 4,729.97 4,781.05
Corn Price ($/bu.) 2.64 2.56 2.49 2.44Total Demand 10,795.06 10,920.1
311,017.8
911,096.40
Food/Alcohol/Industrial 3,938.81 3,949.53 3,957.92 3,964.65Feed/Residual Use 5,006.79 5,111.89 5,194.05 5,260.02Exports 1,827.70 1,837.14 1,844.53 1,850.46CCP Payments (million $)
0.00 580.60 1,095.25 1,507.50
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Fuel Market
Crude Oil (Gallon of Gasoline Equivalent)
cdS c
fS
cTS
Fuel (Gallon of Gasoline Equivalent)
gTS
g EtTS S
EtS
gD
gDcp
gpa
g
cdq c
fq
bccp
cp
gpgp
gq gqgq
de
f
hi j
k
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Added Effects of Ethanol Measured in the Fuel Market
0.4 0.5 0.6 0.7Gasoline Market Price ($/gallon)
2.961 2.961 2.961 2.961
Gasoline Market (billion gallons)
139.897
139.904 139.907
139.907
Gain in Consumer Surplus (billion $)
5.397 5.439 5.460 5.460
Loss to Gasoline & Oil Producers
-5.379 -5.421 -5.442 -5.442
Loss to Foreign Producers -3.753 -3.782 -3.797 -3.797 Loss to Domestic Producers
-1.614 -1.626 -1.633 -1.633
Gain to Ethanol Producers 0.069 0.070 0.071 0.071Net Welfare Gain 3.852 3.883 3.898 3.898
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Summary of Welfare Costs and Benefits: U.S. Ethanol Production
Supply Elasticity 0.50 0.70Food/Alcohol/Industrial -1,008 -813Feed/Residual Use -3,094 -2,466Producer Impact 1,154 975Treasury Costs 4,084 3,274Ethanol Tax Credit -2,761 -2,780Change in Surplus in Fuel MarketOther 16 13Total 9,137 -6,863 9,447 -6,059Net Gain (Domestic) +2,274 +3,388Foreign Net Cost (Grain Market)
-993 -794
Net Gain (Global) +1,281 +2,594
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Comparison of CCPs with Ethanol Tax Credit
0.4 0.5 0.6 0.7Increased Corn Production
1,924.33 1.933.61 1,940.86 1,946.68
Decreased CCPs 4,580.46 4,084.44 3,634.72 3,273.55Increased Ethanol Tax Credit
2,747.94 2,761.19 2,771.54 2,779.86
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Corn and Gasoline Price and Relative Price Ratio, 2005-2007