We analyze the various welfare costs, transfers, trade, and employment consequences of the current U.S. sugar program for U.S. consumers, other sugar users, sugar refiners, cane and beet growing and processing industries, other associated agricultural sectors, and world markets. The removal of the sugar program would increase U.S. consumers and #8217; welfare by $2.9 to $3.5 billion each year and generate a modest job creation of 17,000 to 20,000 new jobs in food manufacturing and related industries. Imports of sugar containing products would fall dramatically, especially confectioneries substituting for domestic inputs under the sugar program. Sugar imports would rise substantially to 5 to 6 million short tons raw sugar equivalent. World price increases would be minor, equivalent to about 1 cent per pound.

Testimony before the US-China Economic and Security Review Commission on April 25, 2013, by Dermot Hayes, professor of Economics and Finance, Iowa State University. Testimony covers impacts on food demand from China's rising incomes and urbanization; the viability of China's attempt to remain self-sufficient in meat and key staple crop production under inherent supply constraints, and the possible technological- and policy-based measures they may pursue in regard of such constraints; and, the main challenges to US-China agricultural trade in the short, medium, and long term.

Participants in futures markets have money on the line and therefore have every incentive to collect and analyze as much information as possible. Academic evidence by Richard Just and Gordon Rausser at Berkeley suggests that futures-based price projections are more accurate than those created from econometric models. One problem with the use of futures contracts to project long-term prices is that there is low liquidity for contracts that trade more than three years into the future. Economists at Iowa State have developed a way to extrapolate futures prices for five or more years into the future.

We develop a real option model of the irreversible native grassland conversion decision. Upon plowing, native grassland can be followed by either a permanent cropping system or a system in which land is put under cropping (respectively, grazing) whenever crop prices are high (respectively, low). Switching costs are incurred upon alternating between cropping and grazing. The effects of risk intervention in the form of crop insurance subsidies are studied, as are the effects of cropping innovations that reduce switching costs. We calibrate the model by using cropping return data for South Central North Dakota from 1989 to 2012. Simulations show that a risk intervention that offsets 20% of a cropping return shortfall increases the sod-busting cost threshold, below which native sod will be busted, by 41% (or $43.7/acre). Omitting cropping return risk across time underestimates this sod-busting cost threshold by 23% (or $24.35/acre), and hence underestimates the native sod conversion caused by crop production.

JEL Classification: Q18, Q38, H23

Keywords: conservation tillage, crop insurance policy, irreversibility, native grassland, sod busting.

The US ethanol industry faces numerous challenges over the next two years. The 2012 drought sharply increased corn prices, so profit margins will be low until least the 2013 corn crops are harvested. A saturated ethanol market means that ethanol mandates that are scheduled to be implemented in the next two years can possibly be met only if ethanol prices are heavily discounted. Thus, profit margins will continue to be low even if production costs fall after the next crop is harvested. In addition, buyers of ethanol can draw on blending credits they have accumulated over the last few years in lieu of ethanol to meet their obligations under the Renewable Fuel Standard (RFS). These banked credits are called RINs (Renewable Identification Numbers) and allow the Environmental Protection Agency (EPA) track how much renewable fuels are being used. When domestic consumption of ethanol exceeds mandated levels, the surplus RINs can be banked to meet future mandates.

This policy brief provides insights into how the next two years will unfold in the ethanol market by focusing on whether the supply of banked RINs will be used in 2013 to help offset current high production costs or in 2014 to help offset low ethanol prices. The guiding principle of the analysis is that owners of banked RINs will use them when they have the greatest value. This principle implies that RINs will be used in 2013 until their 2013 value is equal to their expected value in 2014. The analysis indicates that because of the E10 blend wall and high ethanol production costs, a significant portion of banked RINs will be used in 2013. If, as seems likely, imported sugarcane ethanol is used to meet the portion of the advanced biofuels mandate that is not met by biodiesel meeting its own mandate, then almost all the banked RINs should be used in 2013. This result assumes that corn yields return to trend-line levels in 2014. If sugarcane ethanol is not imported to meet the advanced mandate, then fewer banked RINs will be needed in 2013 to offset heavily discounted ethanol prices. Whether sugarcane ethanol is used or not, the fundamental market forces indicate that RIN prices will be low in both 2013 and 2014.

The ability to use banked RINs increases the feasibility of meeting the 2013 and 2014 mandates and is what keeps expected RIN prices low in both years. Low future prices are why conventional biofuel RIN prices are so low today. This result, though, depends on the assumption that heavily discounted ethanol will incentivize significant amounts of additional ethanol consumption from owners of flex fuel vehicles or by an unexpectedly large and rapid movement to use of E15. If this additional consumption does not materialize, then it seems that EPA will have no choice but to waive conventional ethanol mandates in 2014 because mandated consumption will exceed the ability of consumers to use ethanol as a fuel. Such a waiver, were it to occur, would also validate current low RIN prices.

We compute the fertilizer use in corn, cotton, soybeans, and rapeseed in the period from 1990 to 2010 for a set of selected countries. In each case, we present the consumption of nitrogen, phosphate, and potash by crop and by year, reporting both the fertilizer application rates (in kilograms per hectare) and the fertilizer consumption (in thousand metric tonnes). We allocate a country and #8217;s total nutrient consumption in a given year among competing crops based on publicly available statistics. The resulting allocation of fertilizer among crops is a function of the country and #8217;s nutrients total use, the country and #8217;s cropped areas, crop world prices, and crop- and country-specific fertilizer application rates for some years. In this report we show results on fertilizer consumption by crop for the top fertilizer consuming countries, and a downloadable MS Excel file and #8220;FertilizerDemandByCropData.xls and #8221; shows the complete set of results.

Keywords: agriculture, fertilizer, nitrogen, phosphate, potash

JEL codes: Q10, Q12, Q18

The purpose of this review and analysis is to provide a basic understanding of the issues related to worldwide hypoxic zones and the range of economic questions sorely in need of answers. We begin by describing the causes and extent of hypoxic zones worldwide, followed by a review of the evidence concerning ecological effects of the condition and impacts on ecosystem services. We describe what is known about abatement options and cost effective policy design before turning to an analysis of the large, seasonally recurring hypoxic zone in the Gulf of Mexico. We advance the understanding of this major ecological issue by estimating the relationship between pollutants (nutrients) and the areal extent of the hypoxic zone. This and #8220;production function and #8221; relationship suggests that both instantaneous and legacy contributions of nutrients contribute to annual predictions of the size of the zone, highlighting concerns that ecologists have raised about lags in the recovery of the system and affirms the importance of multiple nutrients as target pollutants. We conclude with a discussion of critical research needs to provide input to policy formation.

Keywords: hypoxia, eutrophication, Gulf of Mexico, nonpoint source pollution, water quality

JEL classification numbers: Q51, Q52, Q57, B4

Nonpoint-source pollution remains a troubling source of water quality problems despite decades of economics research on the matter. Among the chief difficulties for addressing the issue are the property rights assignments implicit in the current policy environment that favor agricultural nonpoint-source pollution, the unobservability of field-level emissions, and complex fate and transport relationships linking them to ambient water quality. Theoretical and practical considerations lead to the focus on observable abatement actions (conservation practices). Biophysical models are increasingly more capable of linking abatement actions to policy-relevant water quality outcomes. If costs of abatement actions are known, finding the least-cost mix of abatement actions is possible, while incorporating the nonlinearity of the pollution process. When costs are not known or information is incomplete, regulators can rely on flexible incentive-based programs, but the design of such programs is complicated by the complexities of emission aggregation. In this work, we focus on the regulator capable of focusing on nonpoint-source emitters. We address the design and performance of three practice-based approaches, ranging from the command-and-control approach mandating practices, to the more flexible performance standard approach where farmers are free to select the optimal mix of on-farm conservation practices, to a fully flexible approach where credits for conservation practices are freely tradable. We do so by utilizing the representation of the nonlinear emission aggregation (fate and transport) process (the Soil and Water Assessment Tool model), and consider cases ranging from the regulator having perfect information on the costs of conservation practices to no information at all. We show how workable programs utilizing the biophysical models and simulation-optimization approaches can be designed, and assess their performance relative to the efficient case. We find that flexible programs perform well both in terms of cost and water quality goals attainment. In particular, a trading program designed around an approximation of the nonlinear pollution process performs well, relative to first-best under no information on the cost of conservation practices.

Knittel and Smith present seven alternative versions of our model all of which apparently show a lower impact of ethanol production on gasoline prices. Four of these models are based on the flawed assumption that one can use the change in refiner and #8217;s margin and the change in gasoline prices interchangeably. The remaining three models all suffer from an obvious and endogeneity problem that when corrected results in results that are similar to ours. What is then left of their paper is a series of regressions of unrelated variables without appropriate controls, and with predictable results. I believe that the magnitude of all our results are reasonable and that they can be used in the current policy debate. Our results show that the closure of ethanol plants will have a serious impact on gasoline prices.

School environment and policies affect children and #8217;s healthy eating choices both at and away from school. We estimate their effect on fruit and vegetable intakes and control for the endogenous decision to participate in the National School Lunch Program. School meal participants consume more total fruits and vegetables, with relatively more at school and less away from school compared to nonparticipants. The policies had little effect on participation itself. Policies to restrict high fat milks or desserts for school lunch and selling competitive foods are associated with greater fruit and/or vegetable intake at school; some policies affected consumption of fruits and/or vegetables at home as well. Policies that encourage fruit and vegetable consumption can improve diets both at and away from school.

There have long been concerns that federal crop insurance subsidies may significantly impact land use decisions. It is well known that classical insurance market information asymmetry problems can lead to a social excess of risky land entering crop production. We provide a conceptual model to show that the problem will arise absent any information failures. This is because the subsidy is (a) proportional to acres planted, and (b) greatest for the most production risky land. Using field-level yield data, we follow this observation through to establish the implications of subsidies for the extent of crop production, with particular emphasis on the US Prairie Pothole Region, where cropland growth is likely to have marked adverse environmental impacts. Simulation results show that up to 3% of land under federal crop insurance would have not been converted from grassland if there had been no crop insurance subsidies. Sodsaver, a provision that eliminates crop insurance and Supplemental Revenue Assistance payments in the first five years of crop production on new breakings, will reduce grassland conversion by 4.9% or less.

Keywords: crop insurance, copula, grassland, land use, Sodsaver, Supplemental Revenue Assistance Payments

JEL Code: Q15, Q18, Q24.

In a recent working paper, Christopher Knittel and Aaron Smith present an attack on a peer-reviewed paper and #8220;The Impact of Ethanol Production on US and Regional Gasoline Markets Relating Ethanol Production to Gasoline Prices" written by myself and Xiaodong Du, and published in 2009 in Energy Policy (Vol. 37 No.8), as well as two subsequent working papers in 2011 and 2012. Our work found that as ethanol production increased, the price of gasoline fell relative to the price of crude oil. Knittel and Smith claim to have refuted this result, and conclude that their and #8220;Empirical models that are most consistent with economic theory suggest effects that are near zero and statistically insignificant. and #8221;

On August 10th, USDA released updated estimates of the size of this year and #8217;s corn and soybean crops. Corn yields are now projected at 123.4 bushels per acre, which combined with a drop in projected harvested acres results in an estimated crop size of 10.8 billion bushels and #8212;down 17 percent from USDA and #8217;s July estimates. Soybean production is now estimated at 2.7 billion bushels and #8212;down 11.7 percent from July projections. The sharply lowered production estimates suggest the preliminary assessment of the impact of the drought on crop prices and biofuel production that I conducted last month needs to be updated.1 In the preliminary July assessment, I estimated that a waiver of the conventional ethanol mandate would reduce corn prices by an average of 4.8 percent across the 500 model outcomes considered. The now lower estimates of corn production imply that this estimated impact of a mandate waiver is too low. However, corn and soybean production are not the only economic variables that have changed in the past month. The average gasoline price used in the July assessment was $2.50 per gallon, which was the average futures price for reformulated gasoline. The average price of the futures contracts from September 2012 to August 2013 is now $2.78 per gallon and #8212;up 11 percent. Higher gasoline prices imply greater market demand for ethanol, which reduces a mandate waiver and #8217;s impact on corn prices. The net effect of higher gasoline prices and lower crop size on crop prices, and the impact of the mandate waiver, can only be determined by re-running the model used in my July assessment. The results from these updated model runs are presented here.

Countries that export biofuel feedstocks such as grain or sugar and that are also importers of motor fuels will have a natural competitive advantage over other countries in the production of biofuels. Argentina is one of a very few countries that both export potential feedstocks and import gasoline and diesel. This combination means that an Argentine ethanol plant will pay less for feedstock and receive a higher price for ethanol than an ethanol plant located in a country that imports feedstocks and exports motor fuels.

Argentina is the world and #8217;s second-largest exporter of corn. This export status, when combined with high internal transportation costs, lowers the price of corn in the major production areas of Argentina. In addition, Argentina and #8217;s farmers need to plant more corn to create a more sustainable balance between corn and soybeans. In particular, in Argentina and #8217;s northern production regions, the large amount of crop residue from increased corn plantings is needed to help build soil quality. Thus there is significant potential for expansion of corn in Argentina, which makes corn an even better feedstock for ethanol.

The variable or direct cost of converting a ton of corn into ethanol in Argentina is comparable to conversion costs in the United States, with the exception that natural gas costs more in Argentina. For a plant that does not dry distillers grains, conversion costs would be approximately $40 per ton of corn processed. Drying distillers grains adds about $10 per ton. The domestic price of corn in Argentina not only reflects the cost of transporting corn from the interior to Rosario, but it also reflects the effects of export taxes and the need to obtain government permission to export. Over the period from October 2010 to March 2012, the cost of corn to an ethanol plant in the state of Iowa in the United States averaged $110 more per ton than the local price of corn paid to farmers in C and #243;rdoba over the same period, and $140 more per ton than the Salta corn price.

Argentina also has a large livestock sector that can readily use distillers grains from corn ethanol plants. Plants that are located close to cattle operations can sell wet distillers grains to these operations thereby saving the cost of drying. Plants that have dryers installed can export distillers grains. Livestock producers in many countries have learned how to use imported distillers grains from US ethanol plants over the last few years, so Argentina would have the ability to export dried distillers grains.

Drought has sharply decreased the size of the US corn and soybean crops this year. While there is no way of knowing for sure how low yields will go, the continuation of hot and dry weather in the major corn and soybean producing areas indicates that yield losses could be of historic proportions. The potential economic impact of low yields and #8212;particularly corn yields and #8212;is heightened this year because of a low buffer stock of corn, and because 10 percent of our motor fuel supply comes from corn. This briefing paper presents preliminary estimates of the economic impacts of low US corn and soybeans yields. The impacts are estimated for the 2012 and #8211;13 crop year that begins on September 1st. Because we do not know what future yields will be or what future gasoline prices will be, we make the preliminary estimates using a stochastic partial equilibrium model. This type of model solves for market-clearing prices for a large number of random and #8220;draws and #8221; of yields and gasoline prices. The model is calibrated to information that is available to us at the current time, including the USDA and #8217;s supply and demand projections and the level of futures prices for gasoline, corn, and ethanol.

We update the findings of the impact of ethanol production on U.S. and regional gasoline markets as reported previously in Du and Hayes (2009 and 2011), by extending the data to December 2011. The results indicate that over the period of January 2000 to December 2011, the growth in ethanol production reduced wholesale gasoline prices by $0.29 per gallon on average across all regions. The Midwest region experienced the biggest negative impact of $0.45/gallon, while the regions of East Coast, West Coast, and Gulf Coast experienced negative impacts of similar magnitudes around $0.20/gallon. Based on the data of 2011 only, the marginal impacts on gasoline prices are found to be substantially higher given the increasing ethanol production and higher crude oil prices. The average effect across all regions increases to $1.09/gallon and the regional impact ranges from $0.73/gallon in the Gulf Coast to $1.69/gallon in the Midwest.

This paper models producers and #8217; interdependent incentives to participate in a voluntary livestock disease control program. Under strategic complementarity among participation decisions, after a slow start momentum can build such that market premium for participation and participation rate increase sequentially. Non-participation, partial participation and full participation can all be Nash equilibria while participation cost heterogeneity will dispose the outcome toward incomplete participation. We find plausible conditions under which temporary government subsidies to the least cost-effective producers causes tipping toward full participation. Applying parameters from the literature on Johnes and #8217; disease, we illustrate factors that may affect participation. These include cost heterogeneity and program effectiveness.

Keywords: Incentives, livestock disease, momentum theorem, strategic complementarity, tipping, voluntary program.

JEL classification: Q18, D83, L15

The tighter linkages between energy and crop markets due to recent climate and energy legislation in the US have large potential environmental impacts beyond carbon sequestration and climate mitigation. These range from effects on water quality and quantity, soil erosion, habitat and biodiversity preservation. These impacts are very location and management-decision specific, as they are the product of atomistic decisions and depend on soil and landscape specific variables. In order to fully understand the effects of biomass markets, the new and stronger linkages and feedback effects between national- and global-scale energy and commodity markets must be properly understood and identified using an integrated perspective. We discuss the various interactions between agricultural and energy markets and their environmental impacts for existing biomass crops and detail how these interactions may be strengthened with the emergence of corn stover as a second generation biofuel feedstock. The tighter coupling of land use and management and energy systems needs to be accounted for to ensure that we have accurate indicators of the sustainability of biomass as an energy resource.

Keywords: Energy and Commodity markets linkages, Integrated energy system assessment, Environmental impacts, Biofuels.

In recent years, the organic sector has grown steadily and significantly. However, little economic research has been performed on risk management in organic agriculture, likely because of the lack of available data. This lack of data may also be why the creation of the current crop insurance policy for organic farmers has been so ad hoc.

The Agricultural Risk Protection Act of 2000 recognized organic farming as a and #8220;good farming practice, and #8221; making federal crop insurance coverage available for organic crops, and taking into account the idiosyncrasies of the organic production system. In addition to the production risks covered for conventional producers, organic farmers who sign up for coverage are compensated for production losses from damage due to insects, disease, and/or weeds. However, the incorporation of organic production into the crop insurance rating structure has been limited. Organic producers are charged an arbitrary 5% premium surcharge over conventional crop insurance. The actuarial fairness of this premium is, at least, questionable. In addition, in the case of crop failure, organic farmers receive compensation based on the prices of conventionally produced crops. Thus, price premiums that organic producers are able to obtain in the market are not compensated for under the current insurance policy structure.

The Food, Conservation and Energy Act of 2008, which amends part of the Federal Crop Insurance Act, was written to investigate some of these claims, requiring the U.S. Department of Agriculture to examine the currently offered federal crop insurance coverage for organic crops as described in the organic policy provisions of the Act (Title XII). Such provisions established the need to review, among other things, the underwriting risk and loss experience of organic crops; determine whether significant, consistent, or systematic variations in loss history exist between organic and nonorganic production; and modify the coverage for organic crops in accordance with the results.

Here we present the major findings of three analyses we performed on key elements of the insurance of organic crops and #8212;prices, yields, and revenue and #8212;in an effort to contribute to the design of an organic crop insurance policy that covers organic producers according to their idiosyncratic risks.

Keywords: crop insurance, organic agriculture.

This analysis uses the 2011 FAPRI-CARD (Food and Agricultural Policy Research Institute and #8211;Center for Agricultural and Rural Development) baseline to evaluate the impact of four alternative scenarios on U.S. and world agricultural markets, as well as on world fertilizer use and world agricultural greenhouse gas emissions. A key assumption in the 2011 baseline is that ethanol support policies disappear in 2012. The baseline also assumes that existing biofuel mandates remain in place and are binding. Two of the scenarios are adverse supply shocks, the first being a 10% increase in the price of nitrogen fertilizer in the United States, and the second, a reversion of cropland into forestland. The third scenario examines how lower energy prices would impact world agriculture. The fourth scenario reintroduces biofuel tax credits and duties. Given that the baseline excludes these policies, the fourth scenario is an attempt to understand the impact of these policies under the market conditions that prevail in early 2011. A key to understanding the results of this fourth scenario is that in the absence of tax credits and duties, the mandate drives biofuel use. Therefore, when the tax credits and duties are reintroduced, the impacts are relatively small. In general, the results show that the entire international commodity market system is remarkably robust with respect to policy changes in one country or in one sector. The policy implication is that domestic policy changes implemented by a large agricultural producer like the United States can have fairly significant impacts on the aggregate world commodity markets. A second point that emerges from the results is that the law of unintended consequences is at work in world agriculture. For example, a U.S. nitrogen tax that might presumably be motivated for environmental benefit results in an increase in world greenhouse gas emissions. A similar situation occurs in the afforestation scenario in which crop production shifts from high-yielding land in the United States to low-yielding land and probably native vegetation in the rest of the world, resulting in an unintended increase in global greenhouse gas emissions.

Keywords: afforestation, energy price, ethanol tax credit, fertilizer, partial equilibrium model, policy analysis.

This report updates the findings in Du and Hayes 2009 by extending the data to December 2010 and concludes that over the sample period from January 2000 to December 2010, the growth in ethanol production reduced wholesale gasoline prices by $0.25 per gallon on average. The Midwest region experienced the biggest impact, with a $0.39/gallon reduction, while the East Coast had the smallest impact at $0.16/gallon. Based on the data of 2010 only, the marginal impacts on gasoline prices are found to be substantially higher given the much higher ethanol production and crude oil prices. The average effect increases to $0.89/gallon and the regional impact ranges from $0.58/gallon in the East Coast to $1.37/gallon in the Midwest. In addition, we report on a related analysis that asks what would happen to US gasoline prices if ethanol production came to an immediate halt. Under a very wide range of parameters, the estimated gasoline price increase would be of historic proportions, ranging from 41% to 92%.

Keywords: crack ratio, crack spread, import elasticity.

We estimate impacts of rainfall and temperature on corn yields by fitting a linear spline model with endogenous thresholds. Using Gibbs sampling and the Metropolis - Hastings algorithm, we simultaneously estimate the thresholds and other model parameters. A hierarchical structure is applied to capture county-specific factors determining corn yields. Results indicate that impacts of both rainfall and temperature are nonlinear and asymmetric in most states. Yield is concave in both weather variables. Corn yield decreases significantly when temperature increases beyond a certain threshold, and when the amount of rainfall decreases below a certain threshold. Flooding is another source of yield loss in some states. A moderate amount of heat is beneficial to corn yield in northern states, but not in other states. Both the levels of the thresholds and the magnitudes of the weather effects are estimated to be different across states in the Corn Belt.

Keywords: Bayesian estimation, Gibbs sampler, hierarchical structure, Metropolis-Hastings algorithm, non-linear

JEL codes: C11, C13, Q10, Q54.

On average, U.S. farmers choose to apply nitrogen fertilizer at a rate that exceeds the ex post agronomically optimal rate. The technology underlying the yield response to nitrogen rewards producers who over apply in years when rainfall is excessive. The overapplication of nutrients has negative environmental consequences because the nitrogen that is not taken up by the plant will typically volatilize causing N2O emissions, or leach causing water pollution. We present a nonlinear offset program that induces farmers to reduce their nitrogen applications to the level that will be consumed by the plant in a typical year and, as a result, reduce N2O emissions from agriculture. The offset program is nonlinear because of the nonlinear relationship between N2O and nitrogen application rates. We assume that the farmer solves an expected utility maximization problem, choosing the optimal nitrogen application rate. The key contribution is a set of simulations that shows that modest offset payments will induce participation in the program and will have a significant impact on both expected and actual N2O emissions without having a significant impact on actual or expected yields. We also find that more risk-averse farmers will reduce emissions by a greater amount than less risk-averse farmers. Finally, we show the distribution of emission reductions induced by this nonlinear offset scheme.

Keywords: carbon offsets, nitrogen fertilizer, nitrous oxide, pollution, uncertainty.

JEL Codes: Q12, Q18, Q51, Q53, Q54, D8

The FAPRI-ISU 2011 World Agricultural Outlook presents projections of world agricultural production, consumption, and trade under average weather patterns, existing farm policy, and policy commitments under current trade agreements and custom unions. These projections are intended for use by farmers, U.S. Congress, government agencies and officials, agribusinesses, and others who do medium-range and long-term planning. This outlook introduces a fertilizer model and a cellulosic ethanol model and presents an improved greenhouse gas emission accounting model. This allows FAPRI-ISU to include in its outlook projections of world fertilizer use by nutrient, by country, by commodity, and by year, and projections of greenhouse gas emissions by source, by country, and by year.

We introduce a world fertilizers model that is capable of producing fertilizer demand projections by crop, by country, by macronutrients, and by year. For each crop, the most relevant countries in terms of production, consumption, or trade are explicitly modeled. The remaining countries are modeled, for each crop, within a regional aggregate. The nutrient coverage includes nitrogen (N), phosphorous (P), and potassium (K). In this report we present the data and procedures used to set up the model as well as the assumptions made. The fertilizer model interacts with the yield equations of the FAPRI-ISU model (Food and Agricultural Policy Research Institute at Iowa State University), and by means of a set of production elasticities, projects each nutrient and #8217;s application rate per hectare for each commodity and each country covered by the FAPRI-ISU model. Then, the application rates and the areas projected by FAPRI-ISU are used to obtain projections of fertilizer demand from agriculture on a global scale. With this fertilizer module, policies that directly affect fertilizer markets, such as input taxes or subsidies, quantity use restrictions, and trade restrictions, can now be explicitly formulated and evaluated. The effects of these policies on global agricultural markets and on greenhouse gas emissions can be evaluated with the FAPRI-ISU model and the Greenhouse Gas in Agriculture Simulation Model (GreenAgSiM). Also, any other policy affecting commodity markets such as input and output price shocks, biofuels mandates, and land-use change can now be evaluated with regard to its impacts on the world fertilizer markets.

Keywords: agriculture, fertilizer, nitrogen, phosphorous, policy analysis, potassium, projections.

JEL codes: Q10, Q11, Q18

The rapid rise in corn prices that began in the fall of 2006 coincided with exponential growth in U.S. corn ethanol production. At about the same time, new ethanol consumption mandates were added to existing ethanol import tariffs and price subsidies. This troika of subsidies leads critics to view the ethanol industry as being beholden to subsidies, which then leads to the conclusion that ethanol subsidies lead to high corn prices. But droughts, floods, a severe U.S. recession, and two general commodity price surges have also occurred since 2006. It simply is wrong to assume that none of these factors has influenced corn prices.

While we cannot rerun history to see what corn prices would be like today without ethanol subsidies, we can rewrite history in a computer model to estimate what impact subsidies have had on market prices. The model would first need to be calibrated so that its solution re-creates what actually happened in agricultural markets. Then it would need to be rerun after government incentives to produce and consume corn ethanol are removed from the model and #8217;s equations. The resulting prices can then be compared to the historical record to estimate the market impacts of ethanol subsidies. This is exactly what we did for the 2005 to 2009 corn marketing years using the same model of the agricultural sector that CARD research staff used for the Environmental Protection Agency to estimate land-use changes from biofuels. To further isolate the effects of ethanol on commodity prices, we also ran a scenario in which we froze ethanol production at 2004 levels.

A number of issues were clarified through this exercise. First, the general pattern of corn prices that we saw in the historical period and #8212;increasing prices in in 2006 and 2007, a price spike in 2008, followed by a sharp price decline in 2009 and #8212;would have occurred without ethanol subsidies or even if corn ethanol production had not expanded. Second, investor fervor for corn ethanol in 2005, 2006, and 2007 would have occurred even without subsidies because a combination of cheap corn, a phase-out of MTBE, and higher crude oil prices made ethanol profitable. Thus, ethanol production would have expanded quite rapidly even without subsidies.

Using the 2004 corn price of $2.06 per bushel as a reference, actual corn prices increased by an average of $1.65 per bushel from 2006 to 2009. Only 14 cents (8%) of this increase was due to ethanol subsidies. Another 45 cents of the increase was due to market-based expansion of the corn ethanol industry. Together, expansion of corn ethanol from subsidies and market forces accounted for 36% of the average increase that we saw in corn prices from 2006 to 2009. All other market factors accounted for 64% of the corn price increase.

Keywords: corn ethanol, corn prices, ethanol subsidies.

In 2000, Congress decided to move away from a fixed-dollar-per-acre premium subsidy to a subsidy percentage that applies to any crop insurance product offered. This change reduced the cost to farmers of moving from yield insurance to revenue insurance by more than 50%. In addition, Congress decided to pay a large proportion of the additional premium for higher coverage levels, paying for more than half the cost of moving from the 65% to the 75% coverage level and about 25% of the additional cost of moving from 75% to 80% coverage. Not surprisingly, farmers responded to these lower costs by moving to more expensive revenue insurance policies and higher coverage levels. This response is part of the reason why the Congressional Budget Office projects that the cost of the crop insurance program exceeds $7 billion per year.

The changes to the premium subsidy structure were made in an era of projected budget surpluses. Does this change still make sense now that federal deficits and overall debt levels are so high? How much could spending be reduced if the premium subsidy structure were changed back? This policy briefing paper provides insights into these questions.

Congress has demonstrated repeatedly that it wants a large proportion of acres to be enrolled in the crop insurance program. The proven way to expand insured acreage is to subsidize farmers and #8217; crop insurance premiums with either a and #8220;lump sum and #8221; subsidy that gives farmers a set amount to participate in the program or a proportional subsidy that pays a set fraction of a farmer and #8217;s premium. The added benefit to the crop insurance industry of a proportional subsidy is that it incentivizes farmers to buy higher coverage levels and more expensive revenue insurance.

If Congress had decided in 2010 to move away from the current system of proportional subsidies to the amount of premium subsidy available for yield insurance, then the 2011 projected cost of the crop insurance program would have declined by about $1.4 billion from the direct savings in premium subsidies, and by another $300 million in lower underwriting gains as farmers moved away from expensive revenue insurance. Further savings would accrue if premium subsidies were fixed at a set dollar amount because this would remove the incentive for farmers to buy more crop insurance than they would buy if they were spending their own money rather than taxpayer dollars. Total savings approaching $2 billion would likely accrue by simply returning to the premium structure that we had before the Agricultural Risk Protection Act.

Farmers would respond to this policy change by buying less revenue insurance and lower coverage levels. This would also reduce their out-of-pocket expenditures. Farm groups would undoubtedly oppose this change, but such opposition would be tempered if the choice were between this change and a reduction in a more valued program, such as direct payments.

Underwriting gains to crop insurance companies would decline significantly. Both companies and agents would have the most to lose from this policy change so they would be expected to oppose it strongly. But in an era of tight budgets, the tax dollars spent on subsidies that incentivize farmers to buy more and different types of crop insurance than they would buy with their own dollars could fall under intense scrutiny.

Keywords: crop insurance, premium subsidies, program costs, revenue insurance.

Agricultural biofuels require the use of scarce land, and this land has opportunity cost. We explore the objective function of a social planner who includes a land constraint in the optimization decision to minimize environmental cost. The results show that emissions should be measured on a per acre basis. Conventional agricultural life cycle assessments for biofuels report carbon emissions on a per gallon basis, thereby ignoring the implications of land scarcity and implicitly assuming an infinite supply of the inputs needed for production. Switchgrass and corn are then modeled as competing alternatives to show how the inclusion of a land constraint can influence life cycle rankings and alter policy conclusions.

Keywords: biofuels, biomass, energy policy, land use, life cycle analysis.

JEL codes: Q16, Q48, Q58

In this article we use the theories of market efficiency and supply of storage to develop a conceptual link between the corn and ethanol markets and explore statistical evidence for the link. We propose that a long-run no-profit condition is established in distant futures markets for ethanol, corn, and natural gas and then use the theory of storage to define an inter-temporal equilibrium among these prices. The relationship shows that under certain conditions, future price expectations will influence current spot prices and that a short-term relationship between input and output prices will exist. This short-term relationship will contain fixed costs. We demonstrate validity of the theory using a structural price model and then by means of time-series techniques.

Keywords: arbitrage, cointegration, corn, energy, ethanol, futures, price-analysis, storage.

The next few weeks should bring some clarity to the future of the 45-cent-per-gallon ethanol tax credit and the 54-cent-per-gallon import tariff because both are scheduled to expire on December 31. Although the arguments in support of and against their extension have changed little since the summer, the economic situation in the corn, livestock, and ethanol industries has changed dramatically.

Agricultural production is strongly conditioned by the fact that inputs are transformed into outputs with considerable time lags, causing the rural household to balance its budget during the season when there are high expenditures for input purchases and consumption and few revenues. With limited access to credit, the budget balance within the year can become a constraint to agricultural production. As is the case in many developing countries, Chinese rural households have been suffering from a lack of access to capital. While China is one of the biggest countries in terms of rural areas and agricultural production, few studies have focused on the impact of credit on agriculture in China. Using survey data, this study aims to examine how credit constraints currently affect agricultural productivity and rural household income in China. The study findings suggest that under credit constraints, production inputs, along with farmers and #8217; capabilities and education, cannot be fully employed. By removing credit constraints, agricultural productivity and rural household income can be improved.

Keywords: credit constraint, household income, productivity, rural China.

Facilitating healthy eating among young people, particularly among minorities who are at high risk for gaining excess weight, is at the forefront of the current policy discussions in the U.S. We investigate the effects of social interactions and relative prices on fruit and vegetable consumption by African American youths. We estimate a simultaneous equation ordered probit model of food intake using rich behavioral data from the Family and Community Health Study and price data from the Economic Research Service and #8217;s Quarterly Food-at-Home Price Database. We find the presence of endogenous effects between a youth and parent, but not between a youth and friend. Lower relative prices of fruits and vegetables tend to increase intakes. Results suggest that health interventions targeting only one family member may be a cost-effective way to increase fruit and vegetable intake by African Americans because of the existence of and #8220;spillover and #8221; consumption effects between the youths and their parents.

Keywords: endogenous effects, fruit and vegetable consumption, healthy food choices, simultaneous equation ordered probit model, social interactions.

JEL Codes: I12, J15, C35

A floor and trade policy in Renewable Identification Numbers (RINs) is the market mechanism by which U.S. biofuel consumption mandates are met. A conceptual model is developed to study the impact of RINs on stimulating investment in cellulosic biofuel refineries. In a two-period framework, we compare the first-period investment level (FIL) in three scenarios: (1) laissez-faire, (2) RINs under a nonwaivable mandate (NWM) policy, and (3) RINs under a waivable mandate (WM) policy. Results show that when firm-level marginal costs are constants, then RINs under WM policy do not stimulate FIL but they do increase the expected profit of more efficient investors. When firm-level marginal costs are not constants, however, RINs under WM policy stimulate FIL. RINs under NWM policy may or may not stimulate FIL, depending on the distribution of second-period cellulosic biofuel prices and on firm-level marginal costs.

Key words: cellulosic biofuels, investment, Renewable Identification Numbers, waivable mandate

JEL classification: D24, L52, Q48

This paper describes an econometric model to evaluate factors associated with a county and #8217;s likelihood of being designated as a private practice shortage area under the United States and #8217; Veterinary Medicine Loan Repayment Program (VMLRP). Study determinants of equilibrium food animal veterinarian location choices were also evaluated and used as a benchmark to assess the shortage designation process. On the whole the program appears to perform quite well. For several states, however, VMLRP shortage designations are inconsistent with the model of food animal veterinarian shortages. Comparative shortage is generally more severe in states that have no VMLRP designated private practice shortage counties than in states that do.

Keywords: economic externalities, food animal veterinarians, loan repayment program.

The industrialization of animal agriculture has fundamentally transformed animal health markets while animal health innovations have promoted this industrialization. The subtlety of these interactions shows how little we know about agricultural industrialization. To illustrate, we consider three stylized features of industrialized animal agriculture. These are the closing off of production activities from external effects, emphasis on control, and use of biosecurity measures. We find that animal disease externalities should lead to higher stocking on any given farm, and also to deficient entry into animal production. Eradicating the disease in a region increases both the stocking rate per farm and the number of farms. We show that antibiotics as a control strategy should promote intensity of production and the substitution of capital for labor. Also, in long-run market equilibrium a reduction in the price of a biosecurity input could plausibly reduce both operation scale and per-animal input use, i.e., biosecurity inputs can behave like a Giffen good. External biosecurity inputs provided through public animal disease management policy may promote on-farm biosecurity, rather than crowd it out.

Keywords: animal disease, biosecurity, biotechnology, competitiveness, confined animal agriculture, economies of scale, tragedy of the commons, veterinary inputs.

JEL Classification Numbers: D2, O1, Q1

While controversy surrounds skewness attributes of typical yield distributions, a better understanding is important for agricultural policy assessment and for crop insurance rate setting. Day (1965) conjectured that crop yield skewness declines with an increase in low levels of nitrogen use, but higher levels have no effect. In a theoretical model based on the law of the minimum (von Liebig) technology, we find conditions under which Day and #8217;s conjecture applies. Employing four experimental plot datasets, we investigate the conjecture by introducing (a) a flexible Bayesian extension of the Just-Pope technology to incorporate skewness, and (b) a quantile-based measure of skewness shift. For corn yields, the Bayesian estimation provides strong evidence in favor of negative skewness at commercial nitrogen rates and for Day and #8217;s conjecture. There was weaker evidence in favor of positively skewed cotton yield and little evidence in favor of the conjecture. The results are also confirmed by the quantile-based measure.

Keywords: crop insurance, Gibbs sampler, Just and Pope technology, negative skewness, quantile regression.

In order to reduce obesity and associated costs, policymakers are considering various policies, including taxes, to change consumers' high-calorie consumption habits. We investigate two tax policies aimed at reducing added sweetener consumption. Both a consumption tax on sweet goods and a sweetener input tax can reach the same policy target of reducing added sweetener consumption. Both tax instruments are regressive, but the associated surplus losses are limited. The tax on sweetener inputs targets sweeteners directly and causes about five times less surplus loss than the final consumption tax. Previous analyses have overlooked this important point.

Keywords: added sweeteners, consumption tax, demand, health policy, soda tax, sugar.

From 1986 to 2007 Egypt's agricultural policy transitioned from a tightly controlled to a more liberalized regime. This study examines the impact of this change on the performance of the wheat (imported grain) and rice (exported grain) sectors.

In terms of profitability, we found that the cost of production increased substantially in both grains, driven primarily by the rise in land rent and labor wage. But the wheat and rice sectors' profitability did not suffer significantly, as advances in new seed technologies and adoption of better farm practices including farm mechanization increased yield and compensated for the higher cost.

Considering market efficiency, we found that over the study period the farmer's share of the consumer's expenditure dropped from 51% to 37% in the case of wheat, while it increased from 24% to 26% in the case of rice. The reverse happened for wholesale and retail margin share, where it increased for wheat and decreased for rice. It is likely that the discipline from foreign suppliers of imported wheat and foreign market opportunities for exported rice may explain the difference in the changes of the distribution of consumer expenditure.

Finally, we found that area response elasticity decreased over time from 0.58 to 0.12 for rice and 0.60 to 0.38 for wheat. The lack of response in rice area despite rising prices is attributed to the land limit strictly imposed by the Government of Egypt because of water supply constraint considerations. On the other hand, the lack of response in wheat area despite rising wheat prices may be attributed to the rising competitiveness of Egyptian clover, which is a main feed ingredient for the growing livestock sector.

Keywords: agricultural liberalization, area response elasticity, market efficiency, profitability.

The U.S. ethanol industry is lobbying hard for an extension of existing ethanol import tariffs and blenders tax credits before they expire at the end of 2010. The purpose of this study is to examine the likely consequences on the U.S. ethanol industry, corn producers, taxpayers, fuel blenders, and fuel consumers if current policy is not extended. Impacts of different ethanol policies in both 2011 and 2014 were estimated.

Estimates were obtained by developing a new stochastic model that calculates market-clearing prices for U.S. ethanol, Brazilian ethanol, and U.S. corn. The model is stochastic because market-clearing prices are calculated for 5,000 random draws of corn yields and wholesale gasoline prices.

Key assumptions in this study are that the strong growth in flex-fuel vehicles in Brazil continues; intermediate ethanol blends with few restrictions are implemented in U.S. markets in 2014; U.S. ethanol production capacity reaches 15 billion gallons in 2014; and Brazilian ethanol production increases by at least 45% by 2014.

Projected strong demand for ethanol in Brazil combined with a largely saturated U.S. ethanol market means that elimination of ethanol import tariffs would have almost no impact on U.S. corn and ethanol markets in 2011. Elimination of the tax credit would impact markets modestly, with ethanol production declining by an average of about 700 million gallons. This reduction in ethanol production would cause corn prices to drop by an average of 23 cents per bushel. Ethanol prices would drop by 12 cents per gallon. Elimination of the tax credit would shift the burden of meeting mandates from taxpayers to blenders and consumers. Taxpayers would save more than $6 billion through elimination of the tax credit, or almost $7.00 per gallon of ethanol produced in excess of mandated amounts.

The impacts of a change in U.S. ethanol policy in 2014 are larger than 2011 impacts because Brazil has a chance to respond by ramping up its ability to export in response to trade liberalization. But because of strong domestic demand growth in Brazil and limits on how fast Brazilian ethanol production can increase, the impacts of a change in policy are still modest. As long as the mandate is maintained, U.S. ethanol production drops by no more than 500 million gallons, corn prices drop by no more than 16 cents per bushel, and ethanol prices drop by no more than 35 cents per gallon. If the impact of intermediate blends is not as strong as assumed in this study, then there will be less incentive for Brazil to export ethanol and the impacts of tariff elimination would be even more modest.

Keywords: blenders tax credit, Brazilian ethanol, ethanol import tariffs, U.S. ethanol policy.

This study examines the world market impact of an expansion in the biofuel sector in the European Union with particular focus on indirect land-use impacts. In the first scenario, an increase of 1 million tonnes oil equivalent (Mtoe) of wheat ethanol use in the European Union expands world land area used in agricultural commodity production by 366,000 hectares, representing an increase of 0.039% in total area. In the second scenario, an increase of 1 Mtoe of rapeseed oil biodiesel use in the European Union expands world land area by 352,000 hectares, representing an increase of 0.038% in total area.

With additional land use somewhat close between the two scenarios, the main difference is the spatial distribution of the sources of additional supply. Because the wheat sector, especially in the European Union, is large (26.4 million hectares), when wheat use for ethanol production expands, most of the adjustment is met within the European Union, with only a 9% reduction in net exports required. In contrast, since the rapeseed sector is smaller (only 7.8 mha in the EU), 57% of additional rapeseed oil used for expanded biodiesel production is supplied from higher imports, allowing substantial adjustment by countries outside of the European Union.

Keywords: biofuels, land use, partial equilibrium model, rapeseed oil biodiesel scenario, wheat ethanol scenario.

This study examines aggregate county income growth across the 48 contiguous states from 1990 to 2005. To control for endogeneity we estimate a two-stage spatial error model and infer parameter significance by implementing a number of spatial bootstrap algorithms. We find that outdoor recreation and natural amenities favor positive growth in rural counties, densely populated rural areas enjoy stronger growth, and property taxes correlate negatively with rural growth. We also compare estimates from the aggregate county income growth model with per capita income growth and find that these two growth processes can be quite different.

Keywords: county income growth, rural development, spatial bootstrapping.

JEL classification: O18, R11, R58

Better integration of the different programs that comprise the farm safety net seems inevitable in the next farm bill given widespread public concern over the rapidly growing federal debt. With $5 billion in direct payments flowing annually to farmers who own or rent base acres without regard to farm income, $7 billion flowing to crop insurance companies over the last two years, and $2.6 billion flowing to cotton farmers in the last two years from programs that violate our trade commitments, there is substantial room for improvement. One path toward better integration would be to modify the ACRE (Average Crop Revenue Election) program so that it covers county revenue rather than state revenue. For approximately the same cost as the direct payment program, 100% of planted acres could be covered at a 95% coverage level. Accounting for county ACRE payments before crop insurance payments are made could easily reduce the cost of the crop insurance program by more than $4 billion per year.

Keywords: ACRE, agricultural risk, Average Crop Revenue Election program, crop insurance, direct payment program, farm bill, farm payments, SURE, Supplemental Revenue Assistance Payments Program.

The FAPRI 2010 U.S. and World Agricultural Outlook presents projections of world agricultural production, consumption, and trade under average weather patterns, existing farm policy, and policy commitments under current trade agreements and custom unions. The outlook uses a macroeconomic forecast developed by IHS Global Insight.

Over the years the control of the Government of Egypt on the agricultural sector has increasingly weakened with the progressive elimination of the input subsidy, area control, price control, procurement control, and the constraints in private sector participation in processing and trade. The only remaining major government involvement is the food subsidy in some wheat products, the "baladi" bread subsidy in particular.

Policy analysis studies in Egypt have been made possible because the Government of Egypt collects and publishes significant amounts of agricultural data on a regular basis. Two of the most widely used data sets are the Household Budget Survey conducted and published by the Central Agency for Public Mobilization and Statistics, and the Food Balance Sheet, which is derived and published by the Ministry of Agriculture. However, differences among various data sources remain and need to be harmonized.

A number of studies have been conducted to estimate food supply and demand parameters (i.e., elasticities) using mostly the two previously mentioned data sets. However, the range of elasticity estimates in these studies is rather wide. For example, price elasticity estimates classify animal products in the range of inelastic to elastic with respect to price, and as necessity to luxury with respect to income. This lack of precision makes these parameters less useful for policy analysis purposes. Further investigations are needed to pinpoint the source of these differences and #8212;whether it is due to data, model specification, or estimation techniques and #8212;so corrective measures can be applied to improve their precision. Only then can credible policy analysis be conducted using these parameters.

Keywords: agricultural data, agricultural policy, Egypt, elasticity, supply and demand.

Expanded mandates under the Renewable Fuel Standard provide ethanol and biodiesel producers a guaranteed future market at volumes that exceed what they have produced in the past. Despite having these mandates in place, biofuel producers continue to support tax credits and ethanol import tariffs. An examination of how the new mandates will be implemented shows that biofuel producers will receive little or no additional benefit from tax credits. Ethanol import tariffs will continue to provide U.S. corn ethanol producers a cost advantage over imported Brazilian sugarcane ethanol until at least 2013 when the demand for sugarcane ethanol to meet the noncellulosic advanced biofuel mandate starts to increase.

Keywords: biodiesel, biofuel tax credit, biofuels mandates, corn ethanol, ethanol import tariffs, fuel subsidies, sugarcane ethanol, Renewable Identification Numbers.

The elasticity of aggregate supply is one key to understanding the degree to which policy-induced increases in demand for biofuel feedstocks or agricultural CO2 offsets will result in higher prices or expanded supply. In this paper we report land supply elasticities for the United States and Brazil estimated directly from the observed changes in cropland and estimated changes in expected returns. The resulting aggregate implied land-use elasticities with respect to price are quite inelastic in the United States and more elastic in Brazil (0.007-0.029 and 0.382-0.895, respectively). However, with pasture land included in Brazil, implied elasticities become much less inelastic (0.007-0.245).

Keywords: acreage elasticity, Brazil, indirect land-use change, land-use elasticities.

This report provides insight into four aspects of modeling indirect land use caused by expanded biofuels production. The report was motivated by the National Biodiesel Board's interest in better understanding how the California Air Resources Board (CARB) estimated an indirect land-use factor for soybean-based biodiesel of 66 gCO2e/MJ, which is more than three times greater than the direct emissions from the fuel. Four aspects of CARB's modeling approach were examined: (1) why CARB estimates that more U.S. forest than pasture will be converted to cropland; (2) whether CARB's predicted land-use changes are consistent with observed U.S. land-use changes in the past decade; (3) how CARB could account for double cropping; and (4) whether CARB's assumption that land brought into production has lower yields than land that was already in production. Results indicate that (1) much of the predicted U.S. forestland conversion is likely due to restrictions on cross-price elasticities imposed by use of the Constant Elasticity of Transformation supply function; (2) a stock of idled cropland could have accommodated the increase in U.S. cropland in 2007 and 2008; (3) the soybean yield elasticity with respect to price can be adjusted to account for double-cropped acres; and (4) there is no empirical support for the assumption that yields in Brazil on new land are lower than yields on old land. The analysis shows how much work needs to be done in this area if the models used to estimate indirect land use are to become widely accepted.

Keywords: CET supply function, double cropping, idle cropland, indirect land use.

Biotech crops have now been grown commercially on a substantial global scale since 1996. This paper examines the production effects of the technology and impacts on cereal and oilseed markets through the use of agricultural commodity models. It analyses the impacts on global production, consumption, trade and prices in the soybean, canola and corn sectors. The analysis suggests that world prices of corn, soybeans and canola would probably be, respectively, 5.8%, 9.6% and 3.8% higher, on average, than 2007 baseline levels if this technology was no longer available to farmers. Prices of key derivatives of soybeans (meal and oil) would also be between 5% and 9% higher, with rapeseed meal and oil prices being about 4% higher than baseline levels. World prices of related cereals and oilseeds would also be expected to be higher by 3% to 4%.

The effect of no longer using the current widely used biotech traits in the corn, soybean and canola sectors would probably impact negatively on both the global supply and utilization of these crops, their derivatives and related markets for grain and oilseeds. The modelling suggests that average global yields would fall for corn, soybeans and canola and despite some likely "compensating" additional plantings of these three crops, there would be a net fall in global production of the three crops of 14 million tonnes. Global trade and consumption of these crops/derivatives would also be expected to fall. The production and consumption of other grains such as wheat, barley and sorghum and oilseeds, notably sunflower, would also be affected. Overall, net production of grains and oilseeds (and derivatives) would fall by 17.7 million tonnes and global consumption would fall by 15.4 million tonnes. The cost of consumption would also increase by $20 billion (3.6%) relative to the total cost of consumption of the (higher) biotech-inclusive level of world consumption. The impacts identified in this analysis are, however, probably conservative, reflecting the limitations of the methodology used. In particular, the limited research conducted to date into the impact of the cost-reducing effect of biotechnology (notably in herbicide-tolerant soybeans) on prices suggests that the price effects identified in this paper represent only part of the total price impact of the technology.

Keywords: biotechnology, cereals, crop yields, oilseeds, price effects, productivity.

Three recent reports have estimated the market impacts of domestic offset programs, including afforestation, contained in the American Clean Energy and Security Act (ACES). The magnitude of these estimated impacts motivates this study. We show that with carbon prices as low as $30 per metric ton, a significant number of U.S. crop acres would be used to grow trees and this would cause price increases for some U.S. commodities. Although we present only one carbon price scenario, the modeling approach that we use suggests that the acreage and price impacts we describe here would increase at higher carbon prices.

Keywords: afforestation, agricultural sector, commodity prices, land-use change.

A team of U.S. analysts visited China to assess the potential for use of distillers dried grain plus solubles (DDGS) in China's livestock sector. They examined the economics of the use of DDGS in feeds, the policy issues surrounding the use of the product, and transportation-logistic constraints in the expansion of DDGS imports. The team collected actual and secondary data to conduct a micro-economic analysis of the impact of DDGS on feed cost, solicited official and expert opinions through interviews, and conducted site visits. They found the development of the DDGS import market in China to be very promising. The microeconomic analysis showed a clear economic incentive for feed millers and livestock producers to use DDGS in their feed ration, with a potential savings of $1 per hundredweight of mixed feed, representing a 6% feed cost savings. Moreover, China has the livestock numbers to support a DDGS market. Concerns about myctoxin contamination and nutrient profile variability must be addressed, however. Clearly differentiating imported DDGS from domestic DDGS is key in positioning U.S. DDGS in the Chinese market. Also, a science-based, and pro-active approach is needed to address policy-induced barriers.

Keywords: DDGS, distillers grain, feed demand, livestock sector, optimal feed ration.

The modeling of price risk in the theory and practice of commodity risk management has been developed far beyond that of crop yield risk. This is in large part due to the use of plausible stochastic price processes. We use the P and #243;lya urn to identify and develop a model of the crop yield expectation stochastic process over a growing season. The process allows a role for agronomic events, such as growing degree days. The model is internally consistent in adhering to the martingale property. The limiting distribution is the beta, commonly used in yield modeling. By applying binomial tree analysis, we show how to use the framework to study hedging decisions and crop valuation.

Keywords: crop insurance, growing degree days, martingale, P and #243;lya urn, stochastic process.

An objective drought index that measures the dry and hot conditions adversely affecting crop yields is used in a regression analysis to test whether corn and soybeans have become more drought tolerant. Results indicate that corn yield losses, whether measured in quantity terms or as a percentage of mean yield, have decreased. The null hypothesis that the absolute level of soybean yield losses due to drought has not changed cannot be rejected. But yield losses in percentage terms have decreased over time. Because drought is the primary cause of yield loss in the U.S. crop insurance program and because U.S. crop insurance rates assume that percentage of yield losses are constant over time, these results indicate that U.S. crop insurance rates in the Corn Belt are too high.

Keywords: corn, crop insurance rates, drought tolerance, soybean, yield risk

A regulator with a fixed budget to spend on securing environmental benefits from farmed land has to choose between how many acres to enroll and the extent of benefits to require of each enrolled acre. Here we consider, given heterogeneous land, what properties of the environmental benefit-to-cost ratio imply for the choice of optimal program as the available budget varies. Conditions are found such that a program of high benefits on few acres is preferred for any budget level. It is also possible that a program delivering low benefits per acre at low cost is preferred on each land type, and yet a high benefit program is optimal policy, a variant of Simpson's paradox.

Keywords: benefit-to-cost ratio, environmental policy, land heterogeneity, Simpson's paradox.

JEL classification: D6; Q2

We use Bayesian Markov Chain Monte Carlo methods to investigate the linkage between the volatility of ethanol security prices and the uncertainty surrounding the profitability of ethanol production and the price variations of non-ethanol energy securities. The joint evolution of return and volatility is modeled as a stochastic process that incorporates jumps in both return and volatility. While a strong and significant correlation is found between the volatility of ethanol securities and profit uncertainty from June 2005 to July 2008, the dynamic pattern of ethanol stock volatility is strikingly similar to that of the S and P 500 energy sector index in the more recent period. Our evidence lends support to the findings in the literature on rational learning from uncertainty in determining the equity price and volatility during the adoption and development of a technological innovation.

Keywords: jumps, rational learning, stochastic volatility, technological innovation.

JEL classification: C11; G12; Q42.

Corn markets are important for many industries, including the seed, fertilizer, meat production/processing and agricultural machinery sectors, all of which are highly concentrated. Oligopoly theory suggests that corn input and field equipment suppliers likely benefit from policies that support corn markets, such as U.S. biofuels policy, while meat companies are likely adversely affected. Employing a linear two-factor (S and P 500 and corn prices) equilibrium asset pricing model, this study investigates the impact of biofuels policy on U.S. agribusiness and food processing firm stock prices. Conditional heteroskedasticity in stock returns is accounted for using a GARCH(1,1) model. Corn price increases are found to have positive effects on excess stock returns for seed, fertilizer and machinery companies, while the impact on meat companies is negative. The results may be interpreted as evidence that crop input suppliers gain from U.S. biofuels policy while meat processors lose.

Keywords: biofuels policy, excess stock returns, GARCH effect, linear factor model.

JEL classification: D43; L13; Q14

Driven by the expanding production of biofuels, the linkage between the agricultural and energy markets is evolving, and that has changed the market for agricultural commodities dramatically. These developments in agricultural markets consequently shifted the distribution of domestic grains and feeds and the utilization of shipping modes for these agricultural products. As the leading producer of corn, soybeans, and biofuels, Iowa is at the forefront of this shift. Because of the importance of maintaining an adequate state transportation system to accommodate the evolving patterns of grain and biofuel flows, it is important to have current information about grain flows from farms and country elevators to destination markets, along with the information about transportation modes utilized for the shipments. Information about biofuel distribution is also crucial for agricultural and transportation policymakers so that they can provide relevant assistance for this growing industry. This study is designed to meet these needs and to provide updated information on grain and biofuel flows in Iowa during the 2006 and 2007 marketing years.

The effectiveness of conservation practices depends on their placement on the fields within the watershed. Cost-effective placement of these practices for maximum water quality benefits on each field requires comparing a very large number of possible land-use scenarios. To address this problem, we combine the tools of evolutionary algorithm with the Soil and Water Assessment Tool (SWAT) model and cost data to develop a trade-off frontier of least cost of achieving nutrient reductions and the corresponding locations of conservation practices. This approach was applied to the Raccoon River Watershed, which drains about 9,400 km2 of an intensive agriculture region in west-central Iowa. Applying genetic algorithm to the calibrated SWAT modeling setup produced multitudes of optimal solutions of achieving nutrient reductions in relation to the total cost of placing these practices. For example, a 30% reduction in nitrate (and a corresponding 53% reduction in phosphorus) at the watershed outlet can be achieved with a cost of $80 million per year. This solution frontier allows policymakers and stakeholders to explicitly see the trade-offs between cost and nutrient reductions.

Keywords: genetic algorithm, nutrient calibration, Raccoon River Watershed, SWAT.

The U.S. federal government implements environmental, biofuels and crop insurance programs that influence land use. They are not well integrated in that cost savings from crop insurance subsidies are not acknowledged when screening land for retirement or when calculating the cost of land retirement programs. We identify and evaluate an optimal benefit index for enrollment in a land retirement program that includes a sub-index to rank land according to insurance subsidy savings. All else equal, land ranked higher in the Lorenz stochastic order should be retired first.

Keywords: agro-environmental policy, budget, Conservation Reserve Program, crop failure, Environmental Benefit Index, Lorenz order.

JEL classification: Q18, Q28

Feeder cattle are fattened to become fed live cattle six months later. The U.S. feeder cattle industry is intensively competitive, so that market efficiency suggests feeder cattle prices should fully reflect feed prices and information on future fed cattle prices. Employing a long time series (1979-2004) of feeder cattle futures, live cattle futures, and local corn prices, we test whether complete pass-through occurs. The results indicate that an increase of a dollar per hundred pounds in the live cattle price leads to an increase of approximately $1.48 per hundred pounds in the feeder cattle price in one month, about 93% of complete pass-through. The corresponding negative effect of a corn price increase is about 87% of complete pass-through. By contrast with agricultural land markets, the results support the hypothesis of Ricardian rent extraction by the scarce asset owner in feeder cattle markets. The results also provide evidence in favor of informational efficiency in futures markets.

Keywords: feeder cattle, futures market efficiency, live cattle, structural change.

JEL classification: D4; Q13

We analyze the sensitivity of greenhouse gas (GHG) emissions from land-use change to modifications in assumptions concerning crop area, yield, and deforestation. For this purpose, we run a modified version of the Center for Agricultural and Rural Development (CARD) Agricultural Outlook Model, which was used previously to assess the impacts of energy price increases and biofuel policy changes on land conversion. To calculate the GHG implications of agricultural activity, we use GreenAgSiM, a model developed to evaluate emissions from land conversion and agricultural production. Both models are applied to scenarios that lead to higher US ethanol production. The results are contrasted with the findings of Searchinger et al., and we explain the role of model assumptions to elucidate the differences. We find that the payback period of corn ethanol's carbon debt is sensitive to assumptions concerning land conversion and yield growth and can range from 31 to 180 years.

Keywords: biofuel, crop yield, greenhouse gas emissions, indirect land-use change.

This paper describes the application of the Soil and Water Assessment Tool (SWAT) model to the Maquoketa River watershed, located in northeast Iowa. The inputs to the model were obtained from the Environmental Protection Agency's geographic information/database system called Better Assessment Science Integrating Point and Nonpoint Sources (BASINS). Climatic data from six weather stations located in and around the watershed, and measured streamflow data from a U.S. Geological Survey gage station at the watershed outlet were used in the sensitivity analysis of SWAT model parameters as well as its calibration and validation for watershed hydrology and streamflow. A sensitivity analysis was performed using an influence coefficient method to evaluate surface runoff and baseflow variations in response to changes in model input hydrologic parameters. The curve number, evaporation compensation factor, and soil available water capacity were found to be the most sensitive parameters among eight selected parameters when applying SWAT to the Maquoketa River watershed. Model calibration, facilitated by the sensitivity analysis, was performed for the period 1988 through 1993, and validation was performed for 1982 through 1987. The model performance was evaluated by well-established statistical methods and was found to explain at least 86% and 69% of the variability in the measured streamflow data for the calibration and validation periods, respectively. This initial hydrologic modeling analysis will facilitate future applications of SWAT to the Maquoketa River watershed for various watershed analyses, including water quality.

Keywords: calibration and validation, hydrologic simulation, sensitivity analysis, SWAT.

This paper assesses the roles of various factors influencing the volatility of crude oil prices and the possible linkage between this volatility and agricultural commodity markets. Stochastic volatility models are applied to weekly crude oil, corn, and wheat futures prices from November 1998 to January 2009. Model parameters are estimated using Bayesian Markov chain Monte Carlo methods. The main results are as follows. Speculation, scalping, and petroleum inventories are found to be important in explaining oil price variation. Several properties of crude oil price dynamics are established, including mean-reversion, a negative correlation between price and volatility, volatility clustering, and infrequent compound jumps. We find evidence of volatility spillover among crude oil, corn, and wheat markets after the fall of 2006. This could be largely explained by tightened interdependence between these markets induced by ethanol production.

Keywords: Gibbs sampling, Merton jump, leverage effect, stochastic volatility.

JEL classification: G13; Q4

The Greenhouse Gases from Agriculture Simulation Model (GreenAgSiM) presented in this paper aims to quantify emissions from agricultural activity on a global scale. The model takes emissions into account that are directly attributable to agricultural production, such as enteric fermentation (methane), manure management (methane and nitrous oxide), and agricultural soil management (nitrous oxide). Furthermore, carbon stock differences from land-use change (carbon dioxide) induced by agriculture are included in the model. The model will provide policy makers with information about the greenhouse gas implications of policy changes.

Keywords: agriculture, greenhouse gas emissions, land-use change, methane, nitrous oxide, soil carbon.

The FAPRI 2009 U.S. and World Agricultural Outlook presents projections of world agricultural production, consumption, and trade under average weather patterns, existing farm policy, and policy commitments under current trade agreements and custom unions. The outlook uses a macroeconomic forecast developed by IHS Global Insight.

The Agricultural Policy Environmental eXtender (APEX) model was developed by the Blacklands Research and Extension Center in Temple, Texas. APEX is a flexible and dynamic tool that is capable of simulating a wide array of management practices, cropping systems, and other land use across a broad range of agricultural landscapes, including whole farms and small watersheds. The model can be configured for novel land management strategies, such as filter strip impacts on pollutant losses from upslope cropfields, intensive rotational grazing scenarios depicting movement of cows between paddocks, vegetated grassed waterways in combination with filter strip impacts, and land application of manure removal from livestock feedlots or waste storage ponds. A description of the APEX model is provided, including an overview of all the major components in the model. Applications of the model are then reviewed, starting with livestock manure and other management scenarios performed for Livestock and the Environment: A National Pilot Project (NPP), and then continuing with feedlot, pesticide, forestry, buffer strip, conservation practice, and other management or land use scenarios performed at the plot, field, watershed, or regional scale. The application descriptions include a summary of calibration and/or validation results obtained for the different NPP assessments as well as for other APEX simulation studies. Available APEX Geographic Information System–based or Windows-based interfaces are also described, as are forthcoming future improvements and additional research needs for the model.

Keywords: APEX, best management practices, farm and watershed simulations, soil carbon, water quality.

Many studies on the impact of biofuels on greenhouse gas emissions do not consider indirect land-use change and land use avoided because of co-products utilization. This paper provides estimates of the land-use credit for corn ethanol when its by-product and #8212;distillers dried grains with solubles (DDGS) and #8212;is used in swine feed rations to substitute for corn and soymeal. The range of estimates used here covers the land-use credit used in the literature. Moreover, this study departs from earlier studies because feed rations from a least-cost optimization are used rather than rations from feeding trials, and DDGS nutrient profile variability is fully accounted for. As a result, displacement rates and the land-use credit can be better characterized using a distribution rather than a single point estimate. The land-use credit for corn ethanol for DDGS used in swine feed rations ranges from -0.367 to -0.596 hectares, whereby substitution for corn in the feed ration accounts for 56.09% and soymeal substitution contributes 48.46%. Variability of the land-use credit is contributed more by the variability of land use from the substitution of soymeal than that of corn.

Finally, when feed compounders discount the DDGS nutrient profile to ensure they are at or above any realized nutrient profile 90% of the time, the land-use credit for corn ethanol declines by 8.47% for DDGS in a swine feed ration.

Keywords: biofuel, DDGS quality, displacement rate, greenhouse gas accounting, land-use credit, optimal, stochastic LP, swine grower-finisher optimal feed ration.

We quantify the emergence of biofuel markets and its impact on U.S. and world agriculture for the coming decade using the multi-market, multi-commodity international FAPRI (Food and Agricultural Policy Research Institute) model. The model incorporates the trade-offs between biofuel, feed, and food production and consumption and international feedback effects of the emergence through world commodity prices and trade. We examine land allocation by type of crop, and pasture use for countries growing feedstock for ethanol (corn, sorghum, wheat, sugarcane, and other grains) and major crops competing with feedstock for land resources such as oilseeds. We shock the model with exogenous changes in ethanol demand, first in the United States, then in Brazil, China, the European Union-25, and India, and compute shock multipliers for land allocation decisions for crops and countries of interest. The multipliers show at the margin how sensitive land allocation is to the growing demand for ethanol. Land moves away from major crops and pasture competing for resources with feedstock crops. Because of the high U.S. tariff on ethanol, higher U.S. demand for ethanol translates into a U.S. ethanol production expansion. The latter has global effects on land allocation as higher coarse grain prices transmit worldwide. Changes in U.S. coarse grain prices also affect U.S. wheat and oilseed prices, which are all transmitted to world markets. In contrast, expansion in Brazil ethanol use and production chiefly affects land used for sugarcane production in Brazil and to a lesser extent in other sugar-producing countries, but with small impacts on other land uses in most countries.

Keywords: acreage, area, biofuel, corn, crops, ethanol, FAPRI model, feedstock, land, sugar, sugarcane.

JEL classification: Q42, Q17, Q18, Q15

We examine four scenarios for the evolution of the biofuel sector using a partial equilibrium model of the world agricultural sector. The model includes the new Renewable Fuels Standard in the 2007 energy act, the two-way relationship between fossil energy and biofuel markets, and a new trend toward corn oil extraction in ethanol plants. At one extreme, one scenario eliminates all support to the biofuel sector when the energy price is low, while the other extreme assumes no distribution bottleneck in ethanol demand growth when the energy price is high. Of the remaining two scenarios, one considers a pure market force driving ethanol demand growth because of the high energy price while the other is a policy-induced shock with removal of the biofuel tax credit when the energy price is high.

We find that the biofuel sector expands with a higher energy price, raising prices of most agricultural commodities through demand-side adjustments for primary feedstocks and supply-side adjustments for substitute crops and livestock. With the removal of all support, including the tax credit, the biofuel sector shrinks, lowering the prices of most agricultural commodities.

We also find that, given distribution bottlenecks, cellulosic ethanol crowds marketing channels, resulting in a discounted price of corn-based ethanol. The blenders' credit and consumption mandates provide a price floor for ethanol and for corn. Finally, the tight linkage between the energy and agricultural sectors resulting from the expanding biofuel sector may raise the possibility of spillover effects of OPEC's market power on the agricultural sector.

Keywords: biofuels, EISA, ethanol, tax credit, world agricultural sector model.

Hypothetical bias is a persistent problem in stated preference studies. We propose and test a method for reducing hypothetical bias based on the cognitive dissonance literature in social psychology. A central element of this literature is that people prefer not to take inconsistent stands and will change their attitudes and behavior to make them consistent. We find that participants in a stated preference willingness-to-pay study, when told that a nonhypothetical study of similar goods would follow, state significantly lower willingness to pay than participants not so informed. In other words, participants adjust their stated willingness to pay to avoid cognitive dissonance from taking inconsistent stands on their willingness to pay for the good being offered.

Keywords: apples; cognitive consistency; hypothetical bias; instrument calibration; willingness to pay.

JEL classification: C91; Q13; Q51

The objective of this study is to analyze the impact of crude oil prices on the EU agricultural sector in an era when the biofuels sector is expanding because of policy initiatives and the desire to find alternative fuel sources. To this end, first a baseline is set up for the EU ethanol, grain, and dried distillers grains markets. In the next step, two different scenarios are run. The first scenario incorporates a 10-Euros-per-barrel increase in the EU crude oil price with the ethanol import tariffs in place. The second scenario incorporates the same shock with the ethanol import tariffs removed. In the first scenario, higher crude oil prices increase ethanol consumption, production, and therefore grain prices. In the second scenario, the impact of trade liberalisation is larger than the impact of the higher crude oil price. So, grain prices decline in this scenario despite an expansion in ethanol consumption. If there were a high enough crude oil price shock, which would affect the EU ethanol market more than trade liberalisation, the net impact on grain, feed, and food prices from the crude oil price shock would be mitigated by the increased trade from trade liberalisation. The study shows that the impact of energy prices on the EU agricultural sector is increasing with the emergence of the biofuels sector. It also illustrates the importance of trade policy in responding to higher crude oil and grain prices.

Keywords: bioeconomic models, energy, trade analysis and policy.

The United States is a large net exporter of corn seeds. Seed trade, including that of corn, has been expanding, but its determinants are not well understood. This paper econometrically investigates the determinants of world demand for U.S. corn seeds with a detailed analysis of trade costs impeding export flows to various markets, including costs associated with distance, tariffs, and sanitary and phytosanitary (SPS) regulations. The analysis relies on a gravity-like model based on an explicit specification of derived demand for seed by foreign corn producers, estimated based on data from 48 countries and for the years 1989 to 2004. An SPS count variable is incorporated as a shifter in the unit cost of seeds faced by foreign users. A sample selection framework is used to account for the determination of which trade flows are positive. All trade costs matter and have had a negative impact on U.S. corn seed exports. Tariffs matter most, followed by distance and SPS measures.

Keywords: corn, distance, phytosanitary, seeds, SPS, tariff, technical barriers, trade cost.

A model of the corn, soybean, and wheat markets calculates welfare effects of the U.S. ethanol tax credit. Crop yields are uncertain, and demand consists of feed, food, energy, and exports. Modeling uncertainty in crop yields allows the valuation of deficiency payments as options. Disaggregating demand records who benefits from the tax credit and by how much; incorporating linked crop markets captures indirect effects important for determining the transfer from consumers to producers. There is $600 million in net welfare loss, increased taxpayer liability, and a large transfer from consumers to farmers. A brief comparison of recent literature is included.

Keywords: biofuel, commodity, ethanol, tax credit, uncertainty, welfare.

Growing demand for cropland products has placed intense pressure on the ability of land resources to support nature, straining public budgets to purchase environmental goods. Fixing overall agricultural output, two policy options are whether to promote more extensive and nature friendly farming practices or to produce intensively on some land and leave the rest wild. Microeconomic models of the topic have not accommodated widely recognized complementary spatial externalities in providing ecological services. This article does so, identifying also a third policy possibility. This is that environmental services can follow a smoothly varying spatial path characterized by harmonic functions.

Keywords: biofuels, environmental policy, spatial externalities, Wirtinger's inequality.

JEL classification: H40, Q28, D62.

This study finds that distillers dried grains with solubles (DDGS) is a dominant feed ingredient in hog finishing rations, despite variability in the product's nutritional content. The optimal inclusion rate has remained at the maximum allowable limit of 20%, suggesting that when a particular DDGS product has low nutrient content, feed compounders simply supplement with corn and soymeal, whatever deficits in nutrients are created as a result.

The study examines DDGS products from 40 different ethanol plants and finds that, relative to the DDGS product with the lowest feed ration cost, the optimal feed ration costs of DDGS products from the other 39 ethanol plants are $0.002 to $0.42 more per cwt of feed. The implied price discount from this cost differential ranges from a low of 0.10% to a high of 25.55%. For an ethanol plant with 50 million gallons in capacity, this price discount amounts to revenue losses of $0.03 million to $6.27 million per year.

The study also found that feed compounders generate $7.51 per ton more in DDGS feed cost savings when they eliminate inter-plant variability and face only intra-plant sources of variability. By including nutritional content variability information in the pricing of DDGS, proper price signals are communicated to ethanol plants so that they can make their own assessments on quality control initiatives to reduce variability in their DDGS products. When the market does not reward better DDGS quality or penalize low product quality, stakeholders do not have any incentive to improve product quality.

Keywords: biofuel, DDGS, DDGS quality, hog feeder-finisher, optimal feed ration, stochastic LP.

This report is divided into two sections. The first part reports the statewide results for each of five surveyed groups: Iowa grain marketers, Iowa grain handlers, Iowa corn processors, Iowa soybean processors, and Iowa biodiesel producers. The state-level results provide a general idea of the grain and biofuel flows that occurred and the transportation that was utilized in the biofuel-boom era. In order to gain further insights into the regional level data, we present the survey results of grain marketers and handlers in each crop reporting district (CRD) in the second part of the report.

Iowa's farmland consists of over 16% hay crops and pastureland, a significant portion of which is under cash rental contracts. This study investigates the comparative relationships between cash rental rates for cropped land and non-cropped land, where the latter includes hay and pastureland. We find that higher crop prices resulting from biofuel demand induces land use conversion from non-cropped land to crop production and thus bids up non-cropped land rents. Compared with changes in cropped land cash rents, non-cropped farmland rents could increase by a higher percentage. Non-cropped land cash rental rates are largely determined by crop and feeder cattle prices, population density, soil quality, and proportion of non-cropped land in a specific area. A primary effect of ethanol subsidies is the redistribution of income between corn growers and livestock producers, whereby higher livestock feed costs together with increasing hay and pastureland cash rents harm the dairy and feedlot beef sectors. Our study shows that, because of the positive effect on rents, the policies have an indeterminate effect on landowners operating in the cow-calf sector.

Keywords: biofuel, pastureland, cash rents, random effects model.

JEL classification: C5, G1, Q1

This study finds that the use of distillers dried grain with solubles (DDGS) as feed is greatly influenced by the development of DDGS products that are available in the market. We find that newer-generation DDGS products have a higher optimal inclusion rate, reaching the maximum allowable rate of 20% for swine, and they have a higher displacement rate of 0.23 for soymeal and 0.93 for corn. Although both traditional and newer-generation DDGS products are primarily used as a corn substitute for energy, it will take only a relatively small change in the price or matrix A (or both) for the newer-generation DDGS to primarily substitute for soymeal for the limiting amino acid, lysine. In contrast, traditional DDGS products have a lower optimal inclusion rate of 7%, and they have a lower displacement rate of 0.75 for corn and 0.08 for soy meal. This product is primarily used as a corn substitute for energy.

When traditional DDGS is introduced in a feed ration, total feed cost declines by 2.64%, or a reduction of $0.29 per cwt of feed. This translates into a $2.17 per head savings in feed cost in a feeder-to-finish operation. Using newer-generation DDGS reduces feed cost by 9.88%, or a reduction of $1.08 per cwt of feed, saving feeder-finisher operations $8.06 per head.

This study suggests that as a substitute product, the price of DDGS will track the price of both corn and soymeal. It will be more of the former until new-generation DDGS can be used as a primary substitute for soymeal and take a dominant share of the market.

Finally, this study clearly points to the critical importance of DDG product innovation to promote widespread and optimal use of DDGS as a feed ingredient, thereby alleviating the food-feed-fuel trade-off.

Keywords: biofuel, DDGS, DG, distillers dried grain with solubles, distillers grain, feeder-finisher, optimal feed ration.

Biotechnology has had an important impact on the agricultural and food industries over the last twelve years by way of fast and extensive adoption of a few genetically modified (GM) crops. This has produced large efficiency gains, including higher yields and reduced costs of weed and pest control, as well as some environmental benefits. The expected development of crops with additional agronomic traits, and with output traits to improve the nutrition and health attributes of food products, holds the potential for even more pervasive impacts. Full realisation of such promises may require overcoming the constraining effects of restrictive GM product regulations.

Keywords: biotechnology, genetically modified products, innovation, regulation, research and development.

JEL classification: Q16, Q18, O33, L51.

With rapid income growth, dairy production and consumption in China have increased significantly. This emergence of the dairy sector will provide opportunities for farmers to participate in a high-value, potentially more lucrative enterprise. The overall goal of this paper is to analyze the major determinants of farmers' participation in dairy production. Our main question is whether or not the pace of the emergence of the dairy processing industry has affected the ability of farmers to participate in dairy production and whether or not it has limited the expansion of their herd size. Based on household, village and processor surveys conducted in the Greater Beijing region, our analysis shows that the location of dairy processing firms is one of the key factors that determines the participation of farmers in dairy production. Although other factors affect participation and herd size and #8212;for example, access to roads and the ability to get a job off the farm (which affects the opportunity cost of household members) and #8212;access to dairy processors is shown to be the major factor that has encouraged the growth of dairy production over the past decade. The results also show that poor, less educated farmers with relatively less access to land are not excluded from the rapid expansion of the Greater Beijing dairy market.

Keywords: China, dairy processing, dairy production.

We estimated a system of Engel functions for two survey periods, 1999/2000 and 2004/2005, to quantify the impact of changes of income on household expenditure behavior and to investigate how expenditure responsiveness changes with income.

We found that rural households have a higher expenditure share for food categories but a lower share for non-food categories compared to urban households. The expenditure share did not change so much between the two survey periods, with only a slight decline in the share of cereals-bread and the non-food category and an increase in the meat-fish-dairy category.

All estimates have a good fit, and the total expenditure explanatory variable is significant in all equations. In general, households with lower incomes are more responsive to changes in income for food categories, and less responsive for non-food categories. This is evident with the higher income elasticity of lower-income rural households compared to urban households for food categories. Moreover, elasticities in the 2004/2005 survey period are higher compared to the 1999/2000 period. Per capita real income declined by 37.2% in 2004/2005. This consumption expenditure pattern has an alleviating effect on the impact of a food crisis since a lower real income associated with a food crisis is accompanied by greater responsiveness of households to reduce their demand for food as their real incomes shrink. This adjustment behavior is most obvious in the case of bread and cereals in rural areas, in which the expenditure elasticity increased from 0.50 to 0.91 as per capita income declined.

Keywords: Engel function, household consumption pattern, income elasticity.

This study characterizes the household food-away-from-home (FAFH) expenditure pattern in Egypt. Specifically, a standard Tobit model was estimated to quantify the responsiveness of Egyptian household FAFH expenditures to changes in their income and selected household demographic characteristics.

We found that the proportion of households with a positive FAFH expenditure is small, at 36% to 38% of the total number of households. These households spent 5% to 8% of their total expenditure on FAFH. Households that are located in urban areas, with more family members, and whose household head is young and male had generally higher levels of FAFH expenditure. The estimated conditional income elasticity is only 0.02, and the unconditional income elasticity is 0.52, suggesting that most of the growth in this sector will be driven by new households participating for the first time in FAFH expenditures. These elasticity estimates are relatively low when compared to those of other countries. However, preliminary estimates from more recent data seem to suggest a higher income elasticity, which is consistent with the expansion of the sector of hotels, restaurants, and other institutions in Egypt.

Keywords: conditional and unconditional elasticity, demand, Egypt, food away from home, HRI (hotels, restaurants, and other institutions).

Production of biofuels from feedstocks that are diverted from food production or that are grown on land that could grow crops has two important drawbacks: higher food prices and decreased reduction in greenhouse gas emissions. If U.S. policy were to change and place greater emphasis on food prices and greenhouse gas reductions, then we would transition away from current feedstocks toward those that do not reduce our ability to produce food. Examples of such feedstocks include crop residues, algae, municipal waste, jatropha grown on degraded land, and by-products of edible oil production. Policy options that would encourage use of these alternative feedstocks include placing a hard cap on ethanol and biodiesel production that comes from corn and refined vegetable oil, thereby forcing growth in biofuel production to come from alternative feedstocks; differentiation of tax credits and subsidies so that the alternative feedstocks receive a higher incentive than do corn and refined vegetable oil; and greatly increased funding for research to hasten the feasibility of producing and refining alternative feedstocks.

Keywords: biofuels, feedstocks, food prices, policy.

While the preponderance of empirical studies point to negative crop yield skewness in a wide variety of contexts, the literature provides few clear insights on why this is so. The purpose of this paper is to make three points on the matter. We show formally that statistical laws on aggregates do not suggest a normal yield distribution. We explain that whenever the weather-conditioned mean yield has diminishing marginal product, then there is a disposition toward negative skewness in aggregate yields. This is because a high marginal product in bad weather states stretches out the left tail of the yield distribution relative to that of the weather distribution. Turning to disaggregated yields, we decompose unconditional skewness into weather-conditioned skewness plus two other terms and study each in turn.

Keywords: conditional distribution, crop insurance, negative skewness, spatial heterogeneity, statistical laws.

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.

This study examines correlates with aggregate county income growth across the 48 contiguous states from 1990 to 2001. Since visual inspection of the variable to be explained shows a clear spatial relationship and to control for potentially endogenous variables, we estimate a two-stage spatial error model. Given the lack of theoretical and asymptotic results for such models, we propose and implement a number of spatial bootstrap algorithms, including one allowing for heteroskedasticity, to infer parameter significance. Among the results of a comparison of the marginal effects in rural versus non-rural counties, we find that outdoor recreation and natural amenities favor positive growth in rural counties, densely populated rural areas enjoy stronger growth, and property taxes correlate negatively with rural growth.

Keywords: county income growth, rural development, spatial bootstrapping.

Concerns about the risk of food supply contamination and the resulting financial losses have limited the development and commercialization of certain pharmaceutical plants. This article develops an insurance pricing model that helps translate these concerns into a cost-benefit analysis. The model first estimates the physical dispersal of maize pollen subject to a number of weather parameters. This distribution is then validated with the limited amount of currently available field trial data. The physical distribution is then used to calculate the premium for a fair-valued insurance policy that would fund the destruction of possibly contaminated fields. The flexible framework can be readily adapted to other crops, management practices, and regions.

Keywords: contemporaneous fertility, costs and benefits, insurance, pharmaceutical maize, pollen dispersal, risks and benefits, stochastic model.

Finisher hog production in North America has seen a shift toward larger production units and contract-organized production since around 1990. Given the efficiency gains and conversion costs associated with contract production, growers may have to choose between long-term commitment through investments and atrophy with intent to exit in the intermediate term. A model is developed to show that growers with any of three efficiency attributes (lower innate hazard of exit, variable costs, or fixed contract adoption costs) are not only more likely to contract but will also produce more and expend more on lowering business survival risks. Using the 2004 U.S. Agricultural Resource Management Survey for hogs, a recursive bivariate probit model is estimated in which exit is affected directly and also indirectly through the contract decision. It is confirmed that contracting producers are less likely to exit. Greater specialization and regional effects are important in increasing the probability of contracting. More education, having non-farm income, and older production facilities are significant factors in increasing the expected rate of exit. The findings suggest further exits by non-contract producers.

Keywords: agricultural industrialization, hog production, occupation choice, production contracts, recursive bivariate probit, relationship-specific investments, sector dynamics.

JEL classification: D23, Q12, J26, J43.

High commodity prices have increased interest in the impacts of federal ethanol policies. We present a stochastic, short-run structural model of U.S. corn, ethanol, and gasoline markets to estimate the price and welfare impacts of alternative policies on producers and consumers of corn, ethanol, and gasoline. The three federal policies that we consider are the Renewable Fuels Standard, the blenders tax credit, and the tariff on imported ethanol. Our model examines the impact of these policies on prices during the 2008/09 marketing year. Our results show that in the short run, a change in U.S. ethanol policies would not have a large, immediate impact on corn prices. Eliminating any one of the policies would reduce average corn prices by less than 4%. Removal of all three programs would decrease average corn prices by 14.5%. The reason why the changes are relatively modest is that existing U.S. ethanol plants will only shut down if their variable cost of production is not covered. Changes in ethanol policies would have large distributional impacts. Corn growers, ethanol producers, and fuel consumers have a large incentive to maintain high ethanol consumption. Gasoline producers have a large incentive to reduce ethanol production and imports. Livestock producers have a large short-run incentive to reduce domestic ethanol production.

Keywords: ethanol policy, stochastic equilibrium model, welfare analysis.

Using pooled regional time-series data and panel data estimation, we quantify the impact of monthly ethanol production on monthly retail regular gasoline prices. This analysis suggests that the growth in ethanol production has caused retail gasoline prices to be $0.29 to $0.40 per gallon lower than would otherwise have been the case. The analysis shows that the negative impact of ethanol on gasoline prices varies considerably across regions. The Midwest region has the biggest impact, at $0.39/gallon, while the Rocky Mountain region had the smallest impact, at $0.17/gallon. The results also indicate that ethanol production has significantly reduced the profit margin of the oil refinery industry. The results are robust with respect to alternative model specifications.

Keywords: crack spread, crude oil prices, ethanol, gasoline prices.

The FAPRI 2008 U.S. and World Agricultural Outlook presents projections of world agricultural production, consumption, and trade under average weather patterns, existing farm policy, and policy commitments under current trade agreements and custom unions. The outlook uses a macroeconomic forecast developed by Global Insight.

Highlighted in the "battle in Seattle" in 1999, anti-trade sentiments still persist, even with development considerations placed at the core of reform negotiations at the World Trade Organization, in which two-thirds of the members are developing countries.

In this paper, the impact of agricultural trade liberalization on food consumption through changes in income and prices is considered. First, agricultural trade liberalization is estimated to raise economic growth by 0.43% and 0.46% in developing and industrialized countries, respectively. Since food consumption of households with lower income are more responsive to changes in income, their food consumption increases more under a trade liberalization regime.

Second, trade liberalization is expected to raise world commodity prices in the range of 3% to 34%. Since, in general, border protection is much higher in developing countries and the level of their tariff rates are likely to exceed the rate of price increases, 87% to 99% of the 83 to 98 countries examined would have lower domestic prices under liberalization. Again, given that low-income countries are more responsive to changes in prices, food consumption in these countries would increase more.

Finally, empirical evidence shows that if there is any harm on small net selling producers in a net importing country, it is neither large in scale nor widespread because the substitution effect dominates the net income effect from the lower domestic prices.

Keywords: agricultural trade liberalization, income and price elasticity, income distribution, developing countries.

The projected expansion in U.S. corn-based ethanol production over the next several years has created concern that large surpluses of distillers grains may result. Most of the distillers grains currently being produced are consumed by the domestic livestock and poultry industries, especially the beef industry. A recent study by the Center for Agricultural and Rural Development projects that the U.S. ethanol industry could produce between 40 million and 88 million metric tons of distillers grains (dry matter basis) per year by 2011. The proportion of these distillers grains that would need to be consumed by the beef industry to prevent surpluses poses questions about how much distillers grains can be included in beef rations, the effects of feeding distillers grains on beef quality, and how current consumption patterns are likely to change as production of distillers grains increases. As more data from feeding trials have become available, a better understanding of the benefits and effects of feeding distillers grains is emerging. In this paper, we use results from a recent USDA producer survey about co-product use in beef production to project how current patterns of use are likely to change as the volume and availability of distillers dried grains increases. We then review recent results from feeding trials using distillers grains in beef rations, including nutritional value and effects on live animal performance and beef quality. Finally, we discuss some of the new technologies being used to improve distillers grains as a ration ingredient and present some general conclusions.

Keywords: beef feeding trials, beef quality, distillers dried grains, ethanol co-products.

Index insurance and probabilistic seasonal forecasts are becoming available in developing countries to help farmers manage climate risks in production. Although these tools are intimately related, work has not been done to formalize the connections between them. We investigate the relationship between the risk management tools through a model of input choice under uncertainty, forecasts, and insurance. While it is possible for forecasts to undermine insurance, we find that when contracts are appropriately designed, there are important synergies between forecasts, insurance, and effective input use. Used together, these tools overcome barriers preventing the use of imperfect information in production decision making.

Keywords: basis risk, climate forecast, index insurance, input decisions, insurance, risk management.

The outlook for U.S. corn markets is inextricably linked to what happens to the U.S. ethanol industry, which depends, in turn, on the level of government subsidies and mandates. We develop a stochastic partial equilibrium model to simulate outcomes for the corn market for the 2008/09 marketing year to gain insight into these linkages. The model includes five stochastic variables that are major contributors to corn price volatility: planted acreage, corn yield, export demand, gasoline prices, and capacity of the ethanol industry. Our results indicate that integration of gasoline and corn markets has increased corn price volatility and that the passage of the expanded ethanol mandates in the Energy Independence and Security Act (EISA) has had modest effects on corn prices. Model results indicate an expected average marketing year price of $4.97 per bushel and a price volatility of 17.5% without the 10 billion gallon EISA mandate but with maintenance of the $0.51-per-gallon tax credit. Imposition of the mandate increases the expected price by 7.1% and price volatility by 12.1%. The effects of the mandate are modest, as ethanol production would average 9.5 billion gallons without the mandate because of high gasoline prices. The mandate is binding with a probability of 37.8%, which indicates that an additional tax or subsidy will be needed to ensure that the mandate is met. High corn prices caused by drought can cause the mandate to bind. Fixing 2008 corn yields at extreme drought levels increases expected corn prices to $6.59 per bushel without a mandate and to $7.99 per bushel with the EISA mandate. An average additional subsidy of $0.73 per gallon of ethanol would be needed to ensure that the mandate is met in this drought scenario. Elimination of the current blenders tax credit would result in the mandate not being met in all cases. On average, a subsidy of $0.41 per gallon would ensure that ethanol production is at least 10 billion gallons in the 2008/09 marketing year.

Keywords: EISA mandate, ethanol, price volatility of corn, stochastic equilibrium.

After entering into farmland rental contracts in the fall, a tenant farmer has the planting flexibility to choose between corn and soybeans. Failure to account for this switching option will bias estimates of what farmers should pay to rent land. Applying contingent claims analysis methods, this study explicitly derives the real option value function. Comparative statics with respect to the volatilities of underlying state variables and their correlations are derived and discussed. Dynamic hedging deltas in this real option context are also developed. Monte Carlo simulation results show that the average cash rent valuation for the real option approach is 11% higher than that for the conventional net present value (NPV) method. The simulated dynamic hedging deltas are shown to differ from the ones implied by the NPV method.

Keywords: cash rent, delta hedging, Monte Carlo simulation, multivariate GARCH, real option, Ricardian rent.

JEL classification: C5, G1, Q1.

Major changes in the use of US sweeteners have occurred since 1970, in both the amount and composition. Increased consumption of caloric sweeteners, especially in beverages, has been linked to excess energy intake and lower-quality diets. We examine how US farm policies (specifically agricultural research and development [R and D] expenditures and commodity programs) have affected the consumption and composition of sweeteners in the US diet. R and D expenditures have lowered the unit cost of most commodities and increased their use in food production, ceteris paribus, although corn has benefited more than sugar crops in the technical progress. Commodity programs have raised the price of sugar and decreased the price of corn; high fructose corn syrup (HFCS) became an inexpensive substitute for sugar in food beginning in 1970. However, the effect of this change in the price of ingredients has become less important over time. Today the farm value share in sweetened food is very small (below 5%), and HFCS has become a specialized input in many food items. Countries with different or no commodity programs experience similar increases in consumption of added sugar. We conclude that the current link between the US consumption of caloric sweeteners and farm policy is tenuous, although historically the link was stronger.

Keywords: added sugar, agricultural policy, caloric, corn, diet, farm policies, HFCS, subsidy, sugar, sweetener.

JEL classification: Q18, D12, I18

Life cycle analysis (LCA) is the standard approach used to evaluate the greenhouse gas (GHG) benefits of biofuels. However, it is increasingly recognized that LCA results do not account for some impacts—including land use changes—that have important implications on GHGs. Thus, an alternative accounting system that goes beyond LCA is needed. In this paper, we contribute to the literature by laying out the basics of a system-wide accounting (SWA) method that takes into account all potential changes in GHGs resulting from biofuel expansion. We applied both LCA and SWA to assess the GHG impacts of ethanol based on Iowa corn.

Growing corn in rotation with soybeans generated 35% less GHG emissions than growing corn after corn. Based on average corn production, ethanol's GHG benefits were lower in 2007 than in 2006 because of an increase in continuous corn in 2007. When only additional corn was considered, ethanol emitted about 22% less GHGs than gasoline. Results from SWA varied with the choice of baseline and the definition of geographical boundaries. Using 2006 as a baseline and 2007 as a scenario, corn ethanol's benefits were about 20% of the emissions of gasoline. If we expand geographical limits beyond Iowa, but assume the same emission rates for soybean production and land use changes as those in Iowa, then corn ethanol generated more GHG emissions than gasoline. These results highlight the importance of boundary definition for both LCA and SWA.

Keywords: biofuels, corn ethanol, greenhouse gas, life cycle analysis, system-wide accounting.

A myriad of policy issues and questions revolve around understanding the bioeconomy. To gain insight, we develop a stochastic and dynamic general equilibrium model and capture the uncertain nature of key variables such as crude oil prices and commodity yields. We also incorporate acreage limitations on key feedstocks such as corn, soybeans, and switchgrass. We make standard assumptions that investors are rational and engage in biofuel production only if returns exceed what they can expect to earn from alternative investments. The Energy Independence and Security Act of 2007 mandates the use of 36 billion gallons of biofuels by 2022, with significant requirements for cellulosic biofuel and biodiesel production. We calculate the level of tax credits required to stimulate this level of production. Subsidies of nearly $2.50 per gallon to biodiesel and $1.86 per gallon to cellulosic biofuel were required, and long-run equilibrium commodity prices were high, with corn at $4.76 per bushel and soybeans at $13.01 per bushel. High commodity prices are due to intense competition for planted acres among the commodities.

Keywords: biodiesel, biofuels, cellulosic, dynamic, ethanol, general equilibrium

Monte Carlo, market.

This study presents the results of comparing land use estimates between three different data sets for the Upper Mississippi River Basin (UMRB). The comparisons were performed between the U.S. Department of Agriculture (USDA) Natural Resource Conservation Service (NRCS) National Resource Inventory (NRI), the U.S. Geological Survey (USGS) National Land Cover Data (NLCD) database, and a combined USDA National Agricultural Statistics Service (NASS) Agricultural Census – NLCD dataset created to support applications of the Hydrologic Unit Model for the U.S. (HUMUS). The comparison was performed for 1992 versions of the datasets because that was the only consistent year available among all three data sources. The results show that differences in land use area estimates increased as comparisons shifted from the entire UMRB to smaller 4- and 8-digit watershed regions (as expected). However, the area estimates for the major land use categories remained generally consistent among all three data sets across each level of spatial comparison. Differences in specific crop and grass/forage land use categories were magnified with increasing refinement of the spatial unit of comparison, especially for close-grown crops, pasture, and alfalfa/hayland. The NLCD close-grown crop area estimates appear very weak relative to the NRI and HUMUS, and the lack of specific crop land use estimates limits its viability for UMRB agricultural-based modeling scenarios. However, the NLCD is a key source of non-agricultural land use data for HUMUS and supplemental wetland land use area estimates for the NRI. We conclude that comparisons between more recent versions of the data sets (i.e., 1997 NRI, 1997 or 2002 Agricultural Census, and 2001 NLCD) would not result in significant additional insights and that the 1997 NRI is a viable land use data source for current CARD UMRB water quality modeling studies. However, adoption of other land use data such as USDA-NASS remote sensing data should be investigated.

Keywords: agricultural land, cropland, HUMUS, land use area estimates, NLCD, non-agricultural land, NRI, UMRB, water quality modeling.

Biofuel subsidies in the United States have been justified on the following grounds: energy independence, a reduction in greenhouse gas emissions, improvements in rural development related to biofuel plants, and farm income support. The 2007 energy act emphasizes the first two objectives. In this study, we quantify the costs and benefits that different biofuels provide. We consider the first two objectives separately and show that each can be achieved with a lower social cost than that of the current policy. Then, we show that there is no evidence to disprove that the primary objective of biofuel policy is to support farm income. Current policy favors corn production and the construction of corn-based ethanol plants. We find that favoring corn happens to be the best way to remove land from food and feed production, thus providing higher commodity prices and income to farmers and landowners. Next, we calculate two sets of alternative biofuel subsidies that are targeted to meeting income transfer objectives and either greenhouse gas emission reductions or fuel energy reductions. The first of these assumes that greenhouse gas emissions and high crop prices are joint objectives, and the second assumes that fuel independence and high crop prices are the joint objectives. Finally, we infer the social willingness to pay for biofuel services. This, in turn, allows us to propose a subsidy schedule that maintains (inferred) social preferences and provides a higher incentive for farmers to choose production of cellulosic materials. This is particularly relevant since the 2007 energy act sets a renewable fuels standard that relies heavily on cellulosic biofuel but does not specify a higher "per gallon" incentive to producers.

Keywords: biofuels, biofuel subsidies, energy security, feedstock, greenhouse gas emissions, social preferences, value-added agriculture.

The economics of geographical indications (GIs) is assessed within a vertical product differentiation framework that is consistent with the competitive structure of the agricultural sector with free entry/exit. It is assumed that certification costs are needed for GIs to serve as (collective) credible quality certification devices, and production of high-quality product is endogenously determined. We find that GIs can support a competitive provision of quality that partly overcomes the market failure and leads to clear welfare gains, although they fall short of delivering the (constrained) first-best level of the high-quality good. The main beneficiaries of the welfare gains are consumers. Producers may also accrue some benefit if the production of high-quality products draws on scarce factors that they own.

Keywords: competitive industry; free entry/exit; geographical indications; Marshallian stability; quality certification; trademarks; welfare.

Farmed animal production has traditionally been a dispersed sector. Biosecurity actions relevant to eradicating infectious diseases are generally non-contractible, and might involve inordinately high transactions costs if they were contractible. If an endemic disease is to be eradicated within a region, synchronized actions need to be taken to reduce incidence below a critical mass so that spread can be contained. Using a global game model of coordination under public and private information concerning the critical mass required, this paper characterizes the success probability in an eradication campaign. As is standard in global games, heterogeneity in private signals can support a unique equilibrium. Partly because of strategic interactions, concentrated production is found to facilitate eradication whenever unit participation costs are decreasing. Policies to manipulate the critical mass have both a direct effect and a strategic coordination effect. Policies to manipulate information can have subtle and non-intuitive consequences. A program to keep disease out can be modeled similarly. It is shown, too, that coordination problems may lead to multiple equilibria in animal disease insurance markets, so that these markets may complicate a disease eradication program by creating opportunities for multiple inefficient equilibria. The presence of private insurance markets may facilitate coordination and, for good or ill, can seal the fate of a program.

Keywords: biosecurity, coordination failure, disease insurance, endemic disease, global games, market access, public information, veterinary public health.

JEL classification: D8, H4, Q1

The recently signed Korea-U.S. Free Trade Agreement (KORUS FTA) grants the U.S. livestock industry with preferential access to South Korea's import market. This study evaluates the likely impacts of the KORUS FTA on the U.S. livestock sector.

Using the Food and Agricultural Policy Research Institute's modeling system, we find that livestock prices increase by 0.5% to 3.8% under the agreement. And together with an expansion by 381 to 883 million pounds in meat exports, the value of U.S. exports increase by close to U.S.$2 billion, or a 15.2% increase.

Because of differential baseline starting market shares and differential rates and staging specifications, the beef sector results are primarily driven by trade diversion impacts, while a combination of trade diversion and trade creation characterizes the results in pork and poultry sectors.

Keywords: dairy, free trade agreement, livestock, poultry, trade creation and diversion.

Biofuels production is expanding rapidly all over the world, driven by rising crude oil prices, the desire of countries to be energy independent, and concerns about climate change. As developed countries, especially the United States, are expanding biofuels production, developing countries are expanding their biofuels industries as well, to power their growing economies. However, developing countries must address the food security issue when they develop biofuels. As China is a developing country with rapid economic growth, population growth, significant demand for fuels, and food security concerns, it serves as a good example for studying the opportunities and challenges faced by developing countries under current conditions. This study analyzes the background, history, and current situation of biofuels development in China. Some implications for developing countries are also provided.

Keywords: biofuels, food security, China.

Based on the Ricardian rent theory, this study employs the variable profit function to analyze the determinants of Iowa cropland cash rental rates using county-level panel data from 1987 to 2005. Accounting for spatial and temporal autocorrelations, responses of local cash rental rates to changes in output prices and other exogenous variables are estimated. We find that Iowa cash rental rates are largely determined by output/input prices, soil quality, relative location, and other county-specific factors. Cash rents go up by $79 for a $1 increase in corn price in the short run. The marginal value of cropland quality, as represented by row-crop corn suitability rating index, is about $1.05. Ethanol plants are not found to have a significant local effect on cash rental rates, impacting local rental markets mainly through the national futures price. Scale of the local livestock industry and adoption of genetically engineered crops have significant impacts on local cash rental rates. In addition, changes in crop output prices are found to have long-run effects on cash rental rates. The long-run change in cash rents is approximately $109-$114 for a $1 change in corn price and is reached in about four years. Our research may be viewed as a test of the Ricardian rent theory. We find limited support for the theory.

Keywords: bargaining, basis, ethanol, land quality shadow price, rate of adjustment, spatial autocorrelation.

JEL classification: C5, G1, Q1

A calibrated model is used to determine the welfare impacts of various regulatory instruments for improving health. The results of a lab experiment are integrated in a partial equilibrium model representing demands for two kinds of fish, one with higher nutritional benefits (canned sardines) and one with higher contamination risks (canned tuna) in France. In the laboratory, information about health effects leads to a statistically significant decrease (increase) in the willingness to pay for tuna (sardines). Simulations with the laboratory results show that, for most cases, a per-unit tax on tuna and a per-unit subsidy on sardines without any information revealed to consumers lead to the highest welfare, because both the tax and subsidy directly internalize health characteristics. The information policy combined with a per-unit tax on tuna and a per-unit subsidy on sardines is socially profitable only if a large proportion of consumers (greater than 95%) receives health information.

Keywords: health, information, regulation, taxation.

Worldwide, a segment of consumers can afford to pay substantial price premiums for very high quality agricultural products with attributes those consumers value. At the same time, many U.S. farmers are producing these high-quality products but are not using market mechanisms that allow them to take fullest advantage of price premiums. This paper describes a pilot program developed to commercialize an origin-based collective brand for very high quality beef. We hypothesize that, if successful, the program would create potential for cattle producers to take fuller advantage of price premiums often captured elsewhere in the marketing channel. Specifically, the pilot program analyzed two mechanisms for differentiating and marketing very high quality beef: a certification mark (a type of U.S. trademark that links products to their geographic origin) and a USDA Process Verification Program (a federal program that allows producers to provide documented assurances to their customers that a stated set of minimum production standards are met). This paper describes how we identified target markets, defined product specifications and determined potential supply, protected property rights using the U.S. trademark system, prepared documentation for a USDA process verification program, and attempted to commercialize Iowa-80 Beef. We also discuss the costs and feasibility of small firms or producer groups obtaining and maintaining a certification mark and a process verification program. Finally, we discuss the challenges and lessons learned from attempting to brand and commercialize very high quality beef.

Keywords: certification mark, collective brands, consumer assurance, geographic origin, process verification.

Worldwide production of biodiesel is growing at a rapid pace. Arguably, the European Union (EU) is the global leader in biodiesel production, but the United States has recently expanded its production. The growth of the biodiesel industry in both regions has been fueled by a series of government-provided financial incentives. However, the timing of the growth and incentive provisions, the nature of the main incentives, and the market conditions differ across regions. This article provides a comparative analysis of the EU and U.S. biodiesel industries, highlighting market and policy aspects that are leading to a rapid but distinct growth.

Keywords: biodiesel, biodiesel industry, biodiesel quality, biofuels, energy security, rapeseed oil, rapeseed methyl ester, soybean oil, soydiesel, ultra low sulfur diesel.

WIC, the Special Supplemental Nutrition Program for Women, Infants, and Children, is a widely studied public food assistance program that aims to provide foods, nutrition education and other services to at-risk, low-income children and pregnant, breastfeeding and postpartum women. From a policy perspective, it is of interest to assess the efficacy of the WIC program - how much, if at all, does the program improve the nutritional outcomes of WIC families? In this paper we address two important issues related to the WIC program that have not been extensively addressed in the past. First, although the WIC program is primarily devised with the intent of improving the nutrition of "target" children and mothers, it is possible that WIC may also change the consumption of foods by non-targeted individuals within the household. Second, although WIC eligibility status is predetermined, participation in the program is voluntary and therefore potentially endogenous. We make use of a triangular treatment-response model in which the dependent variable is the requirement-adjusted calcium intake from milk consumption and the endogenous variable is WIC participation, and estimate it using Bayesian methods. Using data from the CSFII 1994-1996, we find that the correlation between the errors of our two equations is strong and positive, suggesting that families participating in WIC have an unobserved propensity for high calcium consumption. The direct "structural" WIC parameters, however, do not support the idea that WIC participation leads to increased levels of calcium consumption from milk.

Keywords: nutrition, WIC, Bayesian econometrics, treatment-response.

A large empirical literature exists seeking to identify crop yield distributions. Consensus has not yet formed. This is in part because of data aggregation problems but also in part because no satisfactory motivation has been forwarded in favor of any distribution, including the normal. This article explores the foundations of crop yield distributions for the Law of the Minimum, or weakest-link, resource constraint technology. It is shown that heterogeneity in resource availabilities can increase expected yield. The role of stochastic dependence is studied for the technology. With independent, identical, uniform resource availability distributions the yield skew is positive, whereas it is negative whenever the distributions are normal. Simulations show how asymmetries in resource availabilities determine skewness. Extreme value theory is used to suggest a negative yield skew whenever production is in a tightly controlled environment so that the left tails of resource availability distributions are thin.

Keywords: beta-normal distribution, crop insurance, extreme value theory, Liebig technology, limiting factors, order statistics, reliability, weakest link.

We analyze the effects of a domestic standard that reduces an externality associated with the consumption of the good targeted by the standard, using a model in which foreign and domestic producers compete in the domestic good market. Producers can reduce expected damage associated with the externality by incurring a cost that varies by source of origin. Despite potential protectionism, the standard is useful in correcting the consumption externality in the domestic country. Protectionism occurs when the welfare-maximizing domestic standard is higher than the international standard maximizing welfare inclusive of foreign profits. The standard is actually anti-protectionist when foreign producers are much more efficient at addressing the externality than are domestic producers. Possible exclusion of domestic or foreign producers arises with large standards, which may alter the classification of a standard as protectionist or non-protectionist. The paper provides important implications for the estimation and use of tariff equivalents of nontariff barriers.

Keywords: externality, nontariff barriers, protectionism, safety, standard, tariff equivalent.

This paper studies how the strength of intellectual property rights (IPRs) affects investments in biological innovations when the value of an innovation is stochastically reduced to zero because of the evolution of pest resistance. We frame the problem as a research and development (R and D) investment game in a duopoly model of sequential innovation. We characterize the incentives to invest in R and D under two competing IPR regimes, which differ in their treatment of the follow-on innovations that become necessary because of pest adaptation. Depending on the magnitude of the R and D cost, ex ante firms might prefer an intellectual property regime with or without a "research exemption" provision. The study of the welfare function that also accounts for benefit spillovers to consumers—which is possible analytically under some parametric conditions, and numerically otherwise—shows that the ranking of the two IPR regimes depends critically on the extent of the R and D cost.

Keywords: biological resistance, intellectual property rights, Markov perfect equilibrium, patents, research exemption, R and D, sequential innovation.

JEL classification: L00, O31, O34, Q28

The biodiesel industry in the United States has realized significant growth over the past decade through large increases in annual production and production capacity and a transition from smaller batch plants to larger-scale continuous producers. The larger, continuous-flow plants provide operating cost advantages over the smaller batch plants through their ability to capture co-products and reuse certain components in the production process. This paper uses a simple capital budgeting model developed by the authors along with production data supplied by industry sources to estimate production costs, return-on-investment levels, and break-even conditions for two common plant sizes (30 and 60 million gallon annual capacities) over a range of biodiesel and feedstock price levels. The analysis shows that the larger plant realizes returns to scale in both labor and capital costs, enabling the larger plant to pay up to $0.015 more per pound for the feedstock to achieve equivalent return levels as the smaller plant under the same conditions. The paper contributes to the growing literature on the biodiesel industry by using the most current conversion rates for the production technology and current price levels to estimate biodiesel production costs and potential plant performance, providing a useful follow-up to previous studies.

Keywords: biodiesel, biofuels, feedstock, production costs, return on investment.

Growing demand for corn due to the expansion of ethanol has increased concerns that environmentally sensitive lands retired from agricultural production into the Conservation Reserve Program (CRP) will be cropped again. Iowa produces more ethanol than any other state in the United States, and it also produces the most corn. Thus, an examination of the impacts of higher crop prices on CRP land in Iowa can give insight into what we might expect nationally in the years ahead if crop prices remain high. We construct CRP land supply curves for various corn prices and then estimate the environmental impacts of cropping CRP land through the Environmental Policy Integrated Climate (EPIC) model. EPIC provides edge-of-field estimates of soil erosion, nutrient loss, and carbon sequestration. We find that incremental impacts increase dramatically as higher corn prices bring into production more and more environmentally fragile land. Maintaining current levels of environmental quality will require substantially higher spending levels. Even allowing for the cost savings that would accrue as CRP land leaves the program, a change in targeting strategies will likely be required to ensure that the most sensitive land does not leave the program.

Keywords: agricultural markets, Conservation Reserve Program, environmental quality.

The welfare implications of intellectual property protection (IPP) for private sector agricultural research are analyzed, focusing on the realistic cases in which countries provide different IPP levels, technology spills over across countries, and the public sector is involved in research. A model is developed to determine who benefits from, and who should pay for, the associated research. The paper contains some interesting results on the implications of a harmonization of IPP policies through multilateral agreements or via technology that allows research firms to prevent the copying of plants and animals that express traits that have emerged from their research.

Keywords: biotechnology, GURTs, intellectual property, research spillover, welfare analysis.

JEL classification: F13, L11, O31, O34, Q16, Q17

Landscape amenities can be scarce in places with large areas of open space. Intensely farmed areas with high levels of monocropping and livestock production are akin to developed open space areas and do not provide many services in terms of landscape amenities. Open space in the form of farmland is plentiful, but parks and their services are in short supply. This issue is of particular importance for public policy because it is closely linked to the impact of externalities caused by agricultural activities and to the indirect effects of land use dynamics. This study looks at the impact of landscape amenities on rural residential property values in five counties in North Central Iowa using a hedonic pricing model based on geographic information systems. The effect of cropland, pasture, forest, and developed land as land uses surrounding the property is considered, as well as the impact of proximity to recreational areas. The study also includes the effect of other disamenities, such as livestock facilities and quarries, which can be considered part of the developed open space and are a common feature of the Iowa landscape.

Keywords: environmental management, hedonic analysis, land use, spatial externalities.

In the months following the reopening of the Japanese market to imports of U.S. beef on July 26, 2006, Japanese importers were unable to procure adequate supplies. This paper discusses reasons for early supply shortages and some of the policy and trade issues that will affect demand for U.S. beef in the short to medium term. The paper also discusses current marketing efforts for domestic and imported beef, new marketing technologies, and general consumer trends. The information presented in this paper includes on-site observations and data from meetings with Japanese importers and retailers and industry experts during market research in Tokyo and Osaka in November 2006.

Keywords: age verification, beef traceability, food safety, Japan, marketing.

Concerns about biosecurity in the food system raise a variety of issues about how the system is presently organized, why it might be vulnerable, what one could reasonably do to better secure it, and the costs of doing so. After presenting some facts about US agriculture and food, this paper considers three economic aspects of the general problem. One is the global problem, or the way biosecurity measures can affect how countries relate to each other and the global consequences that result. Another is how to best manage the immediate aftermath of a realized threat in order to minimize damage. The third is how to seek to prevent realization of the threat. Some policy alternatives are also presented.

Keywords: agro-terrorism, animal disease, biosecurity, epidemic, food system policy.

The Soil and Water Assessment Tool (SWAT) model is a continuation of nearly 30 years of modeling efforts conducted by the U.S. Department of Agriculture (USDA), Agricultural Research Service. SWAT has gained international acceptance as a robust interdisciplinary watershed modeling tool, as evidenced by international SWAT conferences, hundreds of SWAT-related papers presented at numerous scientific meetings, and dozens of articles published in peer-reviewed journals. The model has also been adopted as part of the U.S. Environmental Protection Agency's BASINS (Better Assessment Science Integrating Point and Nonpoint Sources) software package and is being used by many U.S. federal and state agencies, including the USDA within the Conservation Effects Assessment Project. At present, over 250 peer-reviewed, published articles have been identified that report SWAT applications, reviews of SWAT components, or other research that includes SWAT. Many of these peer-reviewed articles are summarized here according to relevant application categories such as streamflow calibration and related hydrologic analyses, climate change impacts on hydrology, pollutant load assessments, comparisons with other models, and sensitivity analyses and calibration techniques. Strengths and weaknesses of the model are presented, and recommended research needs for SWAT are provided.

Keywords: developmental history, flow analysis, modeling, SWAT, water quality.

This paper explores the effects of a standard influencing care choice. Firm(s) may increase the probability of offering safe products by incurring a cost. Under duopoly, they compete either in prices or in quantities. Under perfect information about safety for consumers, the selected standard that corrects a safety underinvestment is always compatible with competition. Safety overinvestment only emerges under competition in quantities and relatively low values of the cost. Under imperfect information about safety for consumers, the standard leads to a monopoly situation. However, for relatively large values of the cost, a standard cannot impede the market failure coming from the lack of information.

Keywords: information, market structure, safety, standard.

JEL classification: C L1, L5

The successful expansion of the U.S. crop insurance program has not eliminated ad hoc disaster assistance. An alternative currently being explored by members of Congress and others in preparation of the 2007 farm bill is to simply remove the "ad hoc" part of disaster assistance programs by creating a standing program that would automatically funnel aid to hard-hit regions and crops. One form such a program could take can be found in the area yield and area revenue insurance programs currently offered by the U.S. crop insurance program. The Group Risk Plan (GRP) and Group Risk Income Protection (GRIP) programs automatically trigger payments when county yields or revenues, respectively, fall below a producer-elected coverage level. The per-acre taxpayer costs of offering GRIP in Indiana, Illinois, and Iowa for corn and soybeans through the crop insurance program are estimated. These results are used to determine the amount of area revenue coverage that could be offered to farmers as part of a standing farm bill disaster program. Approximately 55% of taxpayer support for GRIP flows to the crop insurance industry. A significant portion of this support comes in the form of net underwriting gains. The expected rate of return on money put at risk by private crop insurance companies under the current Standard Reinsurance Agreement is approximately 100%. Taking this industry support and adding in the taxpayer support for GRIP that flows to producers would fund a county target revenue program at the 93% coverage level.

Keywords: area revenue insurance, commodity programs, crop insurance, Group Risk Income Protection

As worldwide consumer demand for high-quality products and for information about these products increases, labels and geographical indications (GIs) can serve to signal quality traits to consumers. However, GI systems among countries are not homogeneous and can be used as trade barriers against competition. Philosophical differences between the European Union and the United States about how GIs should be registered and protected led to the formation of a WTO dispute settlement panel. In this paper we discuss the issues behind the dispute, the World Trade Organization (WTO) panel decision, and the EU response to the panel decision leading to the new Regulation 510/2006. Given the potential for GI labels to supply consumer information, context is provided for the discussion using recent literature on product labeling. Implications are drawn regarding the importance of the panel decision and the EU response relative to GI issues yet to be negotiated under the Doha Round.

Keywords: geographical indications, product labels, trade barriers.

We analyze the linkage between protectionism and invasive species (IS) hazard in the context of two-way trade and multilateral trade integration, two major features of real-world agricultural trade. Multilateral integration includes the joint reduction of tariffs and trade costs among trading partners. Multilateral trade integration is more likely to increase damages from IS than predicted by unilateral trade opening under the classic Heckscher-Ohlin-Samuelson (HOS) framework because domestic production (the base susceptible to damages) is likely to increase with expanding export markets. A country integrating its trade with a partner characterized by relatively higher tariff and trade costs is also more likely to experience increased IS damages via expanded domestic production for the same reason. We illustrate our analytical results with a stylized model of the world wheat market.

Keywords: exotic pest, intra-industry trade, invasive species, liberalization, trade cost, trade integration, trade protection, two-way trade.

Nontariff barriers (NTBs) refer to the wide range of policy interventions other than border tariffs that affect trade of goods, services, and factors of production. Most taxonomies of NTBs include market-specific trade and domestic policies affecting trade in that market. Extended taxonomies include macro-economic policies affecting trade. NTBs have gained importance as tariff levels have been reduced worldwide. Common measures of NTBs include tariff-equivalents of the NTB policy or policies and count and frequency measures of NTBs. These NTB measures are subsequently used in various trade models, including gravity equations, to assess trade and/or welfare effects of the measured NTBs.

Keywords: externality and trade, nontariff barrier, NTB, protectionism, sanitary and phytosanitary, SPS, standards, TBT, technical barrier to trade.

Organic producers have limited methods of avoiding plant diseases that result in cosmetic damage to produce. Therefore, the appearance of organic produce is often less than perfect. We use an experimental auction to investigate how cosmetic damage affects consumers' willingness to pay for organic apples. We find that 75% of the participants are willing to pay more for organic than for conventional apples given identical appearance. However, at the first sight of any imperfection in the appearance of the organic apples, this segment is significantly reduced. Furthermore, we find that there is a significant effect of interaction between cosmetic damage and product methods. Even though most consumers say they buy organic products to avoid pesticides, we find that cosmetic damage has a larger impact on the willingness to pay for organic apples than for conventional apples.

Keywords: appearance, apples, experimental auctions, organic, willingness to pay.

The ongoing growth of corn-based ethanol production raises some fundamental questions about what impact continued growth will have on U.S. and world agriculture. Estimates of the long-run potential for ethanol production can be made by calculating the corn price at which the incentive to expand ethanol production disappears. Under current ethanol tax policy, if the prices of crude oil, natural gas, and distillers grains stay at current levels, then the break-even corn price is $4.05 per bushel. A multi-commodity, multi-country system of integrated commodity models is used to estimate the impacts if we ever get to $4.05 corn. At this price, corn-based ethanol production would reach 31.5 billion gallons per year, or about 20% of projected U.S. fuel consumption in 2015. Supporting this level of production would require 95.6 million acres of corn to be planted. Total corn production would be approximately 15.6 billion bushels, compared to 11.0 billion bushels today. Most of the additional corn acres come from reduced soybean acreage. Wheat markets would adjust to fulfill increased demand for feed wheat. Corn exports and production of pork and poultry would all be reduced in response to higher corn prices and increased utilization of corn by ethanol plants. These results should not be viewed as a prediction of what will eventually materialize. Rather, they indicate a logical end point to the current incentives to invest in corn-based ethanol plants.

Keywords: biofuels, commodity markets, corn price, energy markets, ethanol.

This study analyzes the impact of price shocks in three input and output markets critical to ethanol: gasoline, corn, and sugar. We investigate the impact of these shocks on ethanol and related agricultural markets in the United States and Brazil. We find that the composition of a country's vehicle fleet determines the direction of the response of ethanol consumption to changes in the gasoline price. We also find that a change in feedstock costs affects the profitability of ethanol producers and the domestic ethanol price. In Brazil, where two commodities compete for sugarcane, changes in the sugar market affect the competing ethanol market.

Keywords: agricultural markets, energy, ethanol, renewable fuels.

JEL classification: Q11, Q18, Q42

Infectious livestock disease creates externalities for proximate animal production enterprises. The distribution of production scale within a region should influence and be influenced by these disease externalities. Taking the distribution of the unit costs of stocking an animal as primitive, we show that an increase in the variance of these unit costs reduces consumer surplus. The effect on producer surplus, total surplus, and animal concentration across feedlots depends on the demand elasticity. A subsidy to smaller herds can reduce social welfare and immiserize the farm sector by increasing the extent of disease. While Nash behavior involves excessive stocking, disease effects can be such that aggregate output declines relative to first-best. Disease externalities can induce more adoption of a cost-reducing technology by larger herds so that animals become more concentrated across herds. For strategic reasons, excess overall adoption of the innovation may occur. Larger herds are also more likely to adopt biosecurity innovations, explaining why larger herds may be less diseased in equilibrium.

Keywords: agricultural industrialization, biosecurity, inefficiency, Nash behavior, overinvestment, technology adoption.

JEL classification: H4, L1, Q1

In line with the rights and incentives provided by the Bayh-Dole Act of 1980, U.S. universities have increased their involvement in patenting and licensing activities through their own technology transfer offices. Only a few U.S. universities are obtaining large returns, however, whereas others are continuing with these activities despite negligible or negative returns. We assess the U.S. universities' potential to generate returns from licensing activities by modeling and estimating quantiles of the distribution of net licensing returns conditional on some of their structural characteristics. We find limited prospects for public universities without a medical school everywhere in their distribution. Other groups of universities (private, and public with a medical school) can expect significant but still fairly modest returns only beyond the 0.9th quantile. These findings call into question the appropriateness of the revenue-generating motive for the aggressive rate of patenting and licensing by U.S. universities.

Keywords: Bayh-Dole Act, quantile regression, returns to innovation, skewed distributions, technology transfer, university patents.

JEL classification: C13, L31, L33, O31, O32

Consumers are in general less informed than producers about the quality of agricultural goods. To reduce he information gap, consumers can rely on standards (e.g., certification) that ensure quality and origin of the goods. These costly standards can be adopted by a group of producers of high-quality goods. We study the formation of such a group that we model as a club. We first investigate under what circumstances a club of a given size is desirable for producers, and for society. We then analyze the optimal size of the club when there exists a direct barrier to entry, and when there is no barrier.

We find that for intermediate values of certification costs, the industry and a club of a given size of certified producers have divergent incentives. Furthermore, if barriers to entry are allowed, an optimal size of club exists, which allows some revelation of information. In the absence of barrier to entry, it is less likely that a club will emerge.

Keywords: Asymmetric information, certification, clubs, quality.

JEL classification: L11, L15, D82, D71

In this paper, we examine the design of permit trading programs when the objective is to minimize the cost of achieving an ex ante pollution target, that is, one that is defined in expectation rather than an ex post deterministic value. We consider two potential sources of uncertainty, the presence of either of which can make our model appropriate: incomplete information on abatement costs and uncertain delivery coefficients. In such a setting, we find three distinct features that depart from the well-established results on permit trading: (1) the regulator's information on firms' abatement costs can matter; (2) the optimal permit cap is not necessarily equal to the ex ante pollution target; and (3) the optimal trading ratio is not necessarily equal to the delivery coefficient even when it is known with certainty. Intuitively, since the regulator is only required to meet a pollution target on average, she can set the trading ratio and total permit cap such that there will be more pollution when abatement costs are high and less pollution when abatement costs are low. Information on firms' abatement costs is important in order for the regulator to induce the optimal alignment between pollution level and abatement costs.

Keywords: delivery coefficient, ex ante pollution target, ex post pollution target, permit trading, total permit cap, trading ratio.

JEL classification: Q58, D02

This paper discusses the implications of using genetically modified crops to biomanufacture pharmaceuticals and industrial compounds from the perspective of their co-existence with conventional agriculture. Such plant-made pharmaceuticals and plant-made industrial products rely on exciting scientific and technological breakthroughs and promise new opportunities for the agricultural sector, but they also entail novel risks. The management of the externalities and of the possible unintended economic effects that arise in this context is critical and poses difficult questions for regulators.

Keywords: agriculture, biopharming, co-existence, externalities, genetically modified products, liability, molecular farming, regulation.

We assess the international competitiveness of the dairy industries in Argentina and Chile, combining recent market intelligence gathered from field visits with quantitative simulations of global policy reform scenarios. Both countries exhibit strong potential for export growth but face significant internal and external barriers to expanding their dairy industries. Global policy reforms would resolve some of the international obstacles to their expansion. Argentina has great potential, but it is handicapped by its current macroeconomic policies, trade policy distortions, and the uncertainty associated with policy implementation. Chile is more limited in terms of natural capacity for expansion, but it has a positive trade and investment environment.

Keywords: Argentina, agricultural trade policy, Chile, comparative advantage, competitiveness, dairy processing, exports, milk production.

The Raccoon River Watershed (RRW) in West-Central Iowa has been recognized as exporting some of the highest nitrate-nitrogen loadings in the United States and is a major source of sediment and other nutrient loadings. An integrated modeling framework has been constructed for the RRW that consists of the Soil and Water Assessment Tool (SWAT) model, the interactive SWAT (i_SWAT) software package, Load Estimator (LOADEST) computer program, and other supporting software and databases. The simulation framework includes detailed land use and management data such as different crop rotations and an array of nutrient and tillage management schemes, derived from the U.S. Department of Agriculture's National Resources Inventory databases and other sources. This paper presents the calibration and validation of SWAT for the streamflow, sediment losses, and nutrient loadings in the watershed and an assessment of land use and management practice shifts in controlling pollution. Streamflow, sediment yield, and nitrate loadings were calibrated for the 1981-1992 period and validated for the 1993-2003 period. Limited field data on organic nitrogen, organic phosphorus, and mineral phosphorus allowed model validation for the 2001-2003 period. Model predictions generally performed very well on both an annual and monthly basis during the calibration and validation periods, as indicated by coefficient of determination (R2) and Nash-Sutcliffe simulation efficiency (E) values that exceeded 0.7 in most cases. A set of land use change scenarios based on taking cropland out of production indicated a significant benefit in reducing sediment yield at the watershed outlet. A second scenario set found that relatively small reductions in nutrient applications resulted in significant reductions in nitrate loadings at the watershed outlet, without affecting crop yields significantly.

Keywords: calibration, management practices, Raccoon River Watershed, SWAT.

In the context of the wine industry, we investigate producers' choice between geographical indications and brand advertising to convey information to consumers. Producers also decide whether or not to select an effort level for improving the quality of their products. We show that if this effort level is selected, a producer will prefer to rely on brand advertising for promoting its products and setting up its own reputation. Despite allowing the cost of promotion to be shared, a geographical indication does not sufficiently reward the effort to improve quality. Finally, the selection of both instruments by producers is examined.

Keywords: brand advertising, effort, geographical indication, GI, quality, wine.

JEL classification: L15, L66, Q13

This study utilizes an analysis technique commonly used in marketing, the conjoint method, to examine the relative utilities of a set of beef steak characteristics considered by a national sample of 1,432 U.S. consumers, as well as additional localized samples representing undergraduate students at a business college and in an animal science department. The analyses indicate that among all respondents, region of origin is by far the most important characteristic; this is followed by animal breed, traceability, the animal feed used, and beef quality. Alternatively, the cost of cut, farm ownership, the non-use of growth promoters, and whether the product is guaranteed tender were the least important factors. Results for animal science undergraduates are similar to the aggregate results except that these students emphasized beef quality at the expense of traceability and the non-use of growth promoters. Business students also emphasized region of origin but then emphasized traceability and cost. The ideal steak for the aggregate group is from a locally produced choice Angus, fed a mixture of grain and grass that is traceable to the farm or origin. If the product was not produced locally respondents indicated that their preferred production states are, in order from most to least preferred, Iowa, Texas, Nebraska, and Kansas.

Keywords: conjoint market analysis, consumer preferences, country of origin, steak quality, traceability, transactions costs.

We analyze the potential impact of continuing the existing U.S. sugar program, replacing it with a standard program, and implementing the standard program with multilateral trade liberalization. Under the North American Free Trade Agreement (NAFTA), duty-free sugar imports from Mexico will undermine the program's ability to operate on a "no-cost" basis to U.S. taxpayers. As the Mexican beverage industry is likely to expand considerably its high-fructose corn syrup use, the sugar thereby displaced will seek a market in the United States. Under these conditions, marketing allotments could not be utilized under current legislation and prices would likely fall to the loan rate. The government would accumulate significant sugar stocks. The replacement of the current sugar program by one similar to other major U.S. crop programs would solve the problem of stock accumulation and accommodate further trade liberalization under a new World Trade Organization (WTO) agreement or future bilateral trade agreements. Our analysis of recent WTO proposals suggests that a WTO agreement is unlikely to impose significant adjustment pressures on the U.S. sugar market beyond those created by NAFTA. The adoption of a standard program would make it easier for the United States to meet its commitments under a new WTO agreement in terms of reductions in trade-distorting amber-box support. Moving to a standard program would increase the costs of the program for taxpayers but would lower costs for sugar users. Given reasonable assumptions about program parameters, the principal program cost would likely be through direct payments rather than through countercyclical or loan-deficiency payments. These costs could be lower than the maximum estimated here, because of limitations on payments to individual producers.

KEYWORDS: DOHA, NAFTA, POLICY, SUGAR, U.S. SUGAR PROGRAM.

This paper examines the incentive of atomistic agricultural producers within a specific geographical region to differentiate and collectively market products. We develop a model that allows us to analyze the market and welfare effects of the main types of real-world producer organizations, using it to derive economic insights regarding the circumstances under which these organizations will evolve, and describing implications of the results obtained in the context of an ongoing debate between the European Union and United States. As the anticipated fixed costs of development and marketing increase and the anticipated size of the market falls, it becomes essential to increase the ability of the producer organization to control supply in order to ensure the coverage of fixed costs. Whenever a collective organization allows a market (with a new product) to exist that otherwise would not have existed there is an increase in societal welfare. Counterintuitively, stronger property right protection for producer organizations may be welfare enhancing even after a differentiated product has been developed. The reason for this somewhat paradoxical result is that legislation aimed at curtailing the market power of producer organizations may induce large technological distortions.

Keywords: agricultural products, collective promotion, geographic indications, supply control, quality.

Consideration of consumers' demand for food quality entails several aspects. Quality itself is a complex and dynamic concept, and constantly evolving technical progress may cause changes in consumers' judgment of quality. To improve our understanding of the factors influencing the demand for quality, food quality must be defined and measured from the consumer's perspective (Cardello, 1995). The present analysis addresses the issue of food quality, focusing on pork—the food that respondents were concerned about. To gain insight into consumers' demand, we analyzed their perception and evaluation and focused on their cognitive structures concerning pork quality. In order to more fully account for consumers' concerns about the origin of pork, in 2004 we conducted a consumer survey of private households. The qualitative approach of concept mapping was used to uncover the cognitive structures. Network analysis was applied to interpret the results. In order to make recommendations to enterprises, we needed to know what kind of demand emerges from the given food quality schema. By establishing the importance and relative positions of the attributes, we find that the country of origin and butcher may be the two factors that have the biggest influence on consumers' decisions about the purchase of pork.

Keywords: cognitive structures, concept mapping, food quality, network analysis, semantic networks, spreading activation network model.

With sustained income growth and fast urbanization, Indonesia will see a major shift in the growth of grain consumption from rice to wheat products. New demand estimates from consumption survey data give a relatively high income elasticity of demand for wheat-based products, in the range of 0.44 to 0.84, with 26% to 34% of this response coming from the impact of income on the probability of consumption for non-consuming households and the remaining impact coming from the response on the level of consumption for households currently consuming wheat products. Urban location of households also contributes an increase of 0.11% to 0.13% to consumption. In contrast, elasticities in rice show a negative impact of income and urbanization on the probability of consumption and a positive but small impact on the unconditional mean. A partial liberalization scenario shows the domestic wheat flour price declining by 13.66%, inducing consumption to increase by 7.06%, which translates into 7.04% growth in imports. This exerts an upward pressure on the world price, increasing it by 0.23%. A faster income growth scenario shows higher consumption (2.60%), imports (2.59%), and prices (0.09%). Countries with a proximity advantage such as Australia, China, and India will benefit from the growth in this market. But, with dependable supply, product quality assurance, and credit availability, North American suppliers may still remain in this market.

Keywords: double-hurdle demand, trade, Westernization of diet.

This paper empirically explores the link between quality and concentration in a cross-section of manufactured goods. Using concentration data and product quality indicators, an ordered probit estimation explores the impact of concentration on quality that is defined as an index of quality characteristics. The results demonstrate that market concentration and quality are positively correlated across different industries. When industry concentration increases, the likelihood of the product being higher quality increases and the likelihood of observing a lower quality decreases.

Keywords: concentration, market structure, ordered probit, product differentiation, product quality.

The structure of the pork production, slaughter, and processing sectors in Mexico has changed significantly since implementation of the North American Free Trade Agreement (NAFTA) and with rising income and increased urbanization. Today, Mexico's pork industry has become more integrated and achieved greater production efficiencies in response to increasing demand for better product quality and stricter sanitary practices in production and processing pork for both the domestic market and for export. However, despite these improvements Mexico's pork industry has not kept up with the rising domestic demand, and Mexico has become an increasingly important market for the United States. A key to the development of increased trade in both live animals and pork is growth of federally inspected or "Tipo Inspecci and #243;n Federal" (TIF) plant production, as well as development of marketing channels and product promotion that support high-quality consumer meat products.

Keywords: live hogs and pork trade, Mexico, NAFTA, pork industry, pork slaughter, TIF plants.