Impacts of Ethanol on Planted Acreage in Market Equilibrium

Hongli Feng, Bruce A. Babcock
June 2008  [08-WP 472]

Land use impacts of biofuel expansion have attracted a tremendous amount of attention because of the implications for the climate, the environment, and the food supply. To examine these impacts, we set up an economic framework that links input use and land allocation decisions with ethanol and agricultural commodity markets. Crops can be substitutes or complements in supply depending on the relative magnitude of three effects of crop prices: total cropland effect, land share effect, and input use effect. We show that with unregulated free markets, total cropland area increases with corn prices whether crops are substitutes or complements in supply. Similarly, higher corn yields from exogenous technical changes lead to cropland expansion. The impacts of yield increases for other crops are ambiguous. With a quantity mandate for ethanol, higher mandates mean larger cropland area if corn and other crops are substitutes in demand. For a given mandate, yield improvement causes total cropland to expand if crop demand is elastic enough, or to contract under a very general condition if crop demand is sufficiently inelastic.

Keywords: biofuels, complements in supply, ethanol, (in)direct land use changes, substitutes in supply, yield increases.

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