measuring unmeasurable land-use changes from biofuels

8/14/2019 Measuring Unmeasurable Land-Use Changes From Biofuels

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Iowa Ag ReviewSummer 2009, Vol. 15 No. 3

Bruce A. Babcock

[email protected]

Consideration and subsequentpassage of the AmericanClean Energy and Security

Act of 2009 by the U.S. House ofRepresentatives focused atten-tion on whether agriculture would

be helped or hurt by the policysobjective of reducing U.S. green-house gas emissions. Even thoughCollin Peterson, chairman of theHouse Agriculture Committee,sought and obtained changes tothe legislation that were favorableto agriculture, many farm groupscame out in opposition to the bill.One example is the American FarmBureau Federation, which estimat-ed that U.S. net farm income woulddecrease by at least $5 billion peryear by 2020. Other farm groupssupported the legislation, includ-ing the National Wheat GrowersAssociation, which found that thePeterson changes helped shape apolicy that will ensure that agri-culture has a place in any climatechange legislation and that pro-ducers are able to reap potentialbenefits rather than just acceptcoming costs.

Whether agriculture will be a

net winner or loser from climatechange policy will depend on thedetails contained in any final pieceof legislation. But the sources ofagricultural costs and benefitsare well known, so it is possibleto identify how agriculture couldbe affected. For example, to theextent that climate change policyleads to increased energy costs,farmers will have to pay more fordiesel, electricity, fertilizer, andpesticides. The effects of these

Costs and Benefits to Agriculture from Climate Change Policy

cost increases on production lev-els and market prices will ultimate-ly determine the extent to whichfarm income is negatively affectedby higher energy costs. Anothersource of costs to agriculturewould arise if agricultural emis-sions of greenhouse gases weresubject to a cap. Such a cap couldforce crop farmers and livestockproducers to limit emissions ofmethane and nitrous oxide, muchas the electricity-generating sectorwill have to meet a cap on carbondioxide emissions. The House bill

explicitly treats agriculture as anuncapped sector, and it is likelythat the Senate will follow suitin any bill that they pass. In theHouse bill, a capped sector wouldbe able to offset excess greenhousegas emissions by buying emis-sion reductions from uncappedsectors, such as agriculture. Thispossibility, of farmers selling emis-sion credits, explains why thereare supporters of climate changepolicy within agriculture.

Why a Carbon Cap-and-TradeSystem Will Increase FarmProduction CostsCurrently, U.S. companies face nolimits on their emissions of green-house gases. A lack of any con-straint means that U.S. industry hasbeen able to choose manufacturingmethods and technologies that min-imize their costs without consider-

ation of their impact on atmospher-ic greenhouse gas concentrations.In economic terms, greenhouse gasemissions have been external to theinternal decision-making processesof companies. Having companiesput a non-zero weight on emissionsis the first step in cutting emissions.

The fairest policy would seem tobe one that requires all companies toreduce their emissions by the samepercentage. But economists haveshown that such a uniform policycan greatly increase the total cost ofmeeting a target reduction. It makesmore sense for companies that canmost easily reduce greenhouse gasemissions to do the greatest share ofthe cutting, thereby allowing othercompanies to continue to emit, aslong as the overall target is met.

Two policies can achieve effi-cient emission reductions: a carbontax and a cap-and-trade program.Under a carbon tax (or a carbon

dioxide equivalent tax for nitrousoxide and methane), companieschoose to either emit and pay the taxor cut emissions. A straightforwardcalculation will reveal the best alter-native. Companies that can easilycut their emissions will do so. Thosethat cannot easily cut emissions willpay the tax. The tax is set at a levelthat increases the price of carbonenough to induce companies to cuttheir emissions enough to meet theoverall targeted reduction.


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2 CENTERFOR AGRICULTURALAND RURAL DEVELOPMENT SUMMER 2009

Iowa Ag Review

ISSN 1080-2193http://www.card.iastate.edu

Iowa Ag Review is a quarterly newsletter published by the

Center for Agricultural and Rural Development (CARD). This

publication presents summarized results that emphasize the

implications of ongoing agricultural policy analysis, analysis

of the near-term agricultural situation, and discussion of agri-

cultural policies currently under consideration.

Editorial Staff

Sandra ClarkeManaging Editor

Becky OlsonPublication Design

Iowa State UniversityIowa State University does not discriminate on the basis of race,

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identity, sex, marital status, disability, or status as a U.S. vet-

eran. Inquiries can be directed to the Director of Equal Opportu-

nity and Diversity, 3680 Beardshear Hall, 515-294-7612.

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Bruce A. BabcockCARD Director

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e-mail or call 515-294-6257.

Printed with soy ink

INTHISISSUECosts and Benefits toAgriculture from ClimateChange Policy .................................. 1

Measuring UnmeasurableLand-Use Changes fromBiofuels ...................................... ...... 4

Agricultural Situation Spotlight:Odds of an ACRE Payment forCorn and Soybean Farmers ........... 7

Recent CARD Publications ........... 12

Under a cap-and-trade pro-gram, overall emissions are capped.Companies are free to emit as muchas they want as long as they havea permit for each ton of emissions.The trade part of the program al-

lows companies to buy and sell thepermits. Those companies that caneasily reduce emissions can makemoney by cutting their emissionsand selling their excess permits.Companies that find it too expensiveto cut emissions can buy permitsand continue to emit.

The key for either policy optionis to increase the price of emission,which automatically creates a profitincentive for companies to figure outwhether it is better to cut emissions

or pay to emit. Thus, it doesnt reallymatter which option is adopted. Whatdoes matter is increasing the cost ofemitting greenhouse gases, which inturn will automatically increase thecost of producing those goods thatcurrently result in large greenhousegas emissions. The industries thatare targeted by the House bill areelectric utilities, oil refiners, naturalgas producers, and some manufactur-ers that produce energy on site. Thismeans that the price of electricity,gasoline, diesel fuel, home heatingoil, and natural gas will increase. Itnaturally follows that products thatrely heavily on these energy sourceswill also become more expensive.

Although agriculture contrib-utes about 6.7 percent of total U.S.greenhouse gas emissions, it facesno future emissions cap under theHouse bill. This does not mean thatagriculture will be unaffected by thecap-and-trade program in the energy

sector. Higher energy costs will trans-late directly into higher prices forelectricity, propane, and diesel fuel,and domestically produced fertilizerand pesticides. The cost of produc-ing fertilizer and pesticides in othercountries will not be directly affectedby U.S. legislation, but if other coun-tries limit their greenhouse gas emis-sions, then their production costswill also increase.

Magnitude of Cost IncreasesThe amount by which farmers costswill increase depends on the quanti-ties of energy-intensive inputs theyuse, the amount of flexibility theyhave in moving away from more

expensive inputs, and the price atwhich carbon settles. An examplefor Iowa corn and soybean produc-tion illustrates an analysis of energycosts under cap and trade.

Iowa farmers who plant bothcorn and soybeans use approxi-mately four gallons of diesel peracre to cultivate, plant, and harvesttheir crops. They also use about60 pounds of nitrogen fertilizer,50 pounds of phosphate, and 65pounds of potash across the two

crops. And corn farmers typicallyuse propane to dry their corn.

The carbon dioxide (CO2) emis-sion from using a gallon of dieselfuel is 10.1 kilograms. Thus, Iowacrop farmers emit about 40 kilo-grams (0.04 metric tons) of CO2 peracre in diesel. If the price of CO2 is$20 per ton, then farmers will haveto pay $0.80 per acre extra for theirdiesel fuel.

Natural gas is the primarysource of energy used to producefertilizer. One source (Gellings andParmenter, 2004) estimates thatthe energy used to produce, pack-age, and transport different fertil-izers is approximately 33,000 Britishthermal units (Btu) per pound fornitrogen, 7,000 Btu per pound forphosphate, and 5,500 Btu per poundfor potash. Natural gas emits 117pounds of CO2 per million Btu. Thisadds up to about 0.14 tons of CO2per acre across corn and soybeans.

At a price of $20 per ton of CO2, thisamounts to $2.85 per acre.To dry a bushel of corn from 19

percent moisture to 15 percent mois-ture uses about 0.088 gallons of pro-pane. With a yield of 180 bushels peracre, this amounts to 15.84 gallonsof propane per acre for corn dryingcosts. Emission of CO2 from burning agallon of propane is 5.525 kilograms.Thus, at a CO2 price of $20 per ton,


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SUMMER 2009 CENTERFOR AGRICULTURALAND RURAL DEVELOPMENT 3

Iowa Ag Review

Adding up the extra costs

from diesel, fertilizer, and

propane at a price of $20

per ton of CO2 results in a

cost increase of $4.52 per

acre for Iowas corn and

soybean farmers. . .

Continued on page 11

propane costs would increase by $1.75per acre of corn, or by $0.87 per acreacross corn and soybeans (assumingno drying costs for soybeans).

Adding up the extra costs fromdiesel, fertilizer, and propane at a

price of $20 per ton of CO2 resultsin a cost increase of $4.52 per acrefor Iowas corn and soybean farm-ers, assuming that farmers make noadjustments to their operations. Adifferent price for CO2 would changethis cost estimate proportionately.To put a cost increase into perspec-tive, the variable cost of producingcorn and soybeans in Iowa in 2009is somewhere around $300 per acre.Thus even a $10.00 increase in thecost of production represents a 3.3

percent increase. To add more con-text to this increase, Iowa corn andsoybean farmers receive approxi-mately $20 per acre in direct pay-ments as part of the 2008 farm bill.In addition, most farmers receivebetween $5.00 and $20.00 per acrein crop insurance subsidies.

Livestock farmers would alsobe affected by energy cost increas-es. According to livestock enter-prise budgets put together by JohnLawrence at Iowa State University,fuel, repairs, and utilities accountfor about 5 percent of total costsin swine when hogs are producedin confinement. Thus a 20 percentincrease in this cost category wouldincrease Iowas average cost of pro-ducing hogs by about 1 percent.

Magnitude of Benefits fromAgricultural Carbon OffsetsThe price of emission permits ina cap-and-trade program will be

determined by the cost of reduc-ing greenhouse gas emissions fromcapped sectors of the economy, orby the cost and availability of offsetsfrom uncapped sectors, such as agri-culture. The Peterson amendment tothe House bill identified offset activi-ties that agriculture could provide.Some of these include conservationtillage, reduced nitrous oxide emis-sions caused by fertilizer use, in-

creased biomass sequestration fromuse of winter cover crops and re-duced use of fallow, and reductions

in methane emissions from livestockproduction. In addition, crop produc-ers could convert their land fromcrop production to tree production.

Benefit for CropsConservation tillage has been advo-cated for years as a way to reducecosts and increase soil health. Andit is now the rare farmer who doesnot try to keep tillage operations to aminimum. But adoption of no-till hasstagnated. A widely used estimate ofthe annual amount by which soil car-bon can be increased from adoptionof no-till farming is one ton of CO2per hectare, or about 0.4 tons peracre. At a $20-per-ton carbon price,this amounts to $8.00 per acre.

The costs of no-till must help ex-plain the stagnation in the number offarmers willing to adopt this method.Some of these costs in Iowa are thecost of a no-till planter, the perceivedbenefit of fall tillage after corn to

help break down the corn stover,and, for farmers who plant continu-ous corn, the delay in planting and/or germination caused by late-to-warm soils. Despite these costs, asignificant number of farmers wouldlikely move to no-till with an offerprice of $8.00 per acre.

Farmers obtain large benefitsfrom nitrogen fertilizer, and thereis uncertainty about how to control

nitrous oxide emissions from cropproduction. Therefore, the onlyprescription for low-cost reduc-tion of nitrous oxide emissions is toincrease the efficiency with whichnitrogen fertilizer is used. But this

prescription holds true with orwithout energy policy incentives,particularly with the high fertil-izer prices recently, so for now it isunclear how much crop farmers canbenefit by trying to reduce nitrousoxide emissions.

According to the U.S. Environ-mental Protection Agency, plantingtrees can sequester between two andnine tons of CO2 per year (see www.epa.gov/sequestration/rates.html). Inthe Corn Belt, sequestration rates are

about four tons per acre. At a price of$20 per ton, this can generate be-tween $40 and $180 per acre per year($80 for Corn Belt land). Of course,to obtain this revenue, a farmer mustquit growing crops and put up an in-vestment to establish a forest. It is un-likely that crop farmers on productiveland will increase profits by swappingcropland for forests. Even if the CO2price were to double, the returns togrowing crops would quickly rise if alot of prime cropland were taken outof production and put into forests.It is more likely that owners of landthat is more suitable for forests thancrops will find it worth their while toestablish trees as a carbon offset. Butmost of this type of land has alreadybeen taken out of crops over the last30 years, so the amount of U.S. landthat can be converted in response tothe cap-and-trade policy is probablyquite limited.

Benefits for LivestockLivestock producers can reducemethane emissions by coveringtheir anaerobic lagoons or by in-vesting in anaerobic digesters tostabilize their manure. Estimates ofthe reduction in methane emissionsvary dramatically across types ofoperations and adopted mitigationtechnologies. There are examples of


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Iowa Ag Review

Bruce A. Babcock

[email protected]

The debate over whether bio-fuels are good for the envi-ronment used to hinge on the

credibility of studies published byDavid Pimentel, professor of ecologyat Cornell University, who concludedthat it took much more energy orfossil fuel to grow, transport, andprocess corn into ethanol than theethanol could ever hope to replaceas transportation fuel. A preponder-ance of other studies on the issue

found the data and methods usedby Pimentel to be suspect, and mostconcluded that biofuels generally,and corn ethanol specifically, havea positive net energy balance, andtheir use as a replacement for gaso-line leads to a reduction in green-house gas emissions.

The debate about whether bio-fuels are a good thing now focusessquarely on whether their use causestoo much conversion of natural lands

into crop and livestock productionaround the world. The worry is thatthe loss of carbon stocks on theconverted land would more thanoffset the direct reduction in green-house gas emissions caused by lowergasoline use. The California Air Re-sources Board (CARB) has concludedthat corn ethanol causes such largeamounts of land conversion that itdoes not qualify as a low-carbon fuel.In its recent analysis of greenhousegas emissions from biofuels, the U.S.

Environmental Protection Agency(EPA) estimates that corn ethanoland biodiesel made from soybean oilcause enough land-use changes tocall into question whether these bio-fuels meet required greenhouse gasreductions.

The debate over land-use chang-es caused by biofuels has two mainthreads. The first is a policy ques-tion focusing on whether the United

Measuring Unmeasurable Land-Use Changes from Biofuels

States should even account forland-use changes in other countrieswhen considering greenhouse gasregulations of biofuels. The secondis on the actual measurement ofland-use changes and whether themodels used by CARB and EPA areaccurate enough to support regula-tions that have billion-dollar conse-quences on the biofuels industry.

Most of the audience in thedebate over measurement of theland-use impacts of biofuels haslittle understanding of the approachthat is used by CARB and EPA toestimate land-use changes from bio-fuels. Hence, it is difficult for mostto judge whether the approach isaccurate enough to justify its use.An overview of the procedures usedto estimate indirect land use shouldhelp clarify the most important is-sues involved.

Why Are Economists Doingthe Measuring?The three groups that have beenmost involved in estimating land-usechanges from biofuels are econo-mists at Iowa State University, TexasA&M University, and Purdue Uni-versity (see the Editors note at theend of the article). Economists areinvolved because land-use changes

from biofuels expansion is a re-sponse by farmers and other land-owners to a change in the supply of

crops available to meet non-fuel de-mands. The economic story for cornethanol is as follows. Expansion ofU.S. corn ethanol production increases the demand for corn. This demandincrease causes the market price ofcorn to rise. The increase in the priceof corn causes U.S. farmers to growmore corn. Growing more U.S. corncan be done by increasing yieldson existing land, by allocating moreland to corn and less to other crops,and by creating more farmland. Cut-

ting acreage to other crops can leadto price increases for these cropsalso. Because agricultural commodi-ties are traded worldwide, the pricechanges for corn and other cropsseen in the United States will also beseen by farmers in other countries,thereby affecting their agriculturalsupplies. Those farmers around theworld who see higher market priceswill also increase yields, reallocateland among crops, and bring new

land into production.Each step of this corn ethanolstory requires an economist to esti-mate the likely response of farmers,livestock producers, the food indus-try, other industrial users of agricul-tural commodities, and non-farminglandowners to a change in marketprice. The key factors that influencehow much land is converted to crop-land include the following:

Which crops will U.S. farmers

decrease in response to highercorn prices?

How much U.S. pasture andforest land will be converted tocrops?

How much will farmers in-crease yields in response toprice?

How much will prices, de-mand, and production changein each important producing

The debate about whether

biofuels are a good thingnow focuses squarely on

whether their use causes

too much conversion of

natural lands into crop and

livestock production

around the world.


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Iowa Ag Review

or consuming country inresponse to a change in U.S.production and exports?

Economists understand thatthe answers to each of these ques-

tions depend greatly on how muchtime passes before the response ismeasured. For example, a $1.00-per-bushel increase in the price of cornwill cause almost no U.S. land to beconverted from pasture or forest tocropland after a single year. But asustained $1.00-per-bushel increasefor five years will likely result insome land being converted. Similar-ly, supply and demand in other coun-tries will respond a great deal moreafter five years than after one year.

Economists also understandthat the precision with which theseresponses can be measured de-pends greatly on the quality andavailability of data. We have a fairlygood idea of the response of U.S.livestock producers to higher feedcosts: given enough time, livestocksupplies will be reduced, resultingin higher meat and dairy prices.But economists ability to estimatehow Brazilian cattle ranchers willrespond to the resulting increasein demand for Brazilian beef is lessprecise. The Brazilian cattle sectoris simply less well understood thanthe U.S. livestock sector (even byBrazilian economists). The sectorhas had less scrutiny, and data mea-suring its performance and struc-ture is much less developed.

More often than we want toadmit, economists face situationsin which we do not have adequatedata to make precise estimates of

the response of a sector to a pricechange. The backup strategy is torely on economic theory to deter-mine the direction of the response,and then to make a reasonable as-sumption about the magnitude of theresponse. For example, as anybodywho has taken Econ 101 knows, sup-ply curves slope up. This means thatthe quantity supplied to the marketwill increase if market demand in-

creases. Thus, economists know thatthe Brazilian cattle herd will increaseby some amount if U.S. meat suppliesdecrease. But an informed judgmentabout the magnitude of the changewill rely on a trade economist looking

at Brazilian trade policy to determinethe extent to which a change in U.S.meat supplies will affect Brazilianprices. Then an experienced agricul-tural economist will know somethingabout the cattle cycle and estimatehow long it might take for the Bra-zilian cattle herd to respond to aprice increase. A dedicated Brazilianagricultural economist with detailedknowledge of Brazilian environmen-tal enforcement mechanisms willthen make an estimate of the extent

to which pasture can expand in fron-tier forests. This estimate will thenbe linked with the cattle cycle andthe price transmission to come upwith an informed estimate of the tim-ing and extent to which the Braziliancattle herd will change in response toan increase in feed prices caused bybiofuels expansion.

Most of the parameters usedto capture supply and demandresponses to price changes that

populate the models economists useto estimate the impact of biofuelson land are based on less detailedknowledge than the given exampleassumes. Rather, estimates are basedon previous work (the applicabil-ity and quality of which is typicallynot addressed), insight of the ana-lyst, and overall reasonablenesswith respect to the problem at hand.Economists need not apologize forconstructing models in this manner:it simply is the only way to proceed

because of a lack of data and special-ized knowledge about agriculturaland food systems around the world.

One implication of this relianceon a combination of theory andjudgment is that it is quite difficultto construct confidence intervalsaround model predictions. The dis-tribution of most model parametersis not known because most are notestimated statistically. Furthermore,

those parameters that are takenfrom the original studies in whichthey were estimated are generallynot directly applicable to the newuse for which they are being gath-ered. Thus, there is no way that

model predictions can be testedstatistically.

Modelers will conduct sensitiv-ity analyses in recognition of theuncertainty underlying key modelparameters. The parameters arevaried from what might be consid-ered reasonable lower and upperbounds on their values, and thenmodel predictions over the param-eter range are calculated. Althoughuseful as a way to identify whichmodel parameters are most impor-

tant in determining outcomes, thisprocedure cannot be representedas a statistical test of the model.

Why Model Predictions Will NotBe Consistent with HistoryOne criticism of the models used byCARB and EPA to estimate indirectland use is that their predictions ofland-use changes seem not to trackwith the actual changes in land usethat we have observed in the last fewyears in response to sharply higherbiofuels volumes. One might hopethat the land-use changes we haveseen could be used to validate ordiscredit the model predictions. Forexample, two recent studies (Tokgozet al. 2007 and Hertel et al. 2009)of the impact of expanded biofuelson U.S. and world agriculture bothestimate that expansion of cornethanol would be accompanied by alarge increase in corn production, alarge decrease in soybean produc-

tion, and significant decrease in cornand soybean exports. History differsfrom these predictions. Since 2005,corn ethanol has increased by aboutsix billion gallons. Corn acreage hasincreased by about 6 percent, whichis consistent with predictions. Butsoybean acreage has increased bymore than 7 percent, corn exportsare projected to be flat in the 2009/10marketing year, and soybean ex-


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Iowa Ag Review

ports are projected to increase bymore than 25 percent. The modelpredictions completely missed thelarge expansion in U.S. soybeanproduction that has accompaniedcorn ethanol expansion and the abil-

ity of the United States to maintainor expand its exports of corn andsoybeans.

The problem with comparingactual outcomes with model predic-tions is that they are not comparable.The impacts of biofuels are estimatedby modelers relative to what theirmodels predict will be the agricul-tural situation under a baselinevolume of biofuels, and under a setof assumptions about future mac-roeconomic growth, growing condi-

tions, crop yields, exchange rates,and government policies. The modelsare then re-run with a higher biofuelsvolume and the same set of condi-tioning assumptions. By subtractingthe model results with higher biofuelvolumes from the baseline modelresults, modelers hope to isolate theeffects of biofuels expansion becauseall other factors that affect the agri-cultural economy are held constant.

But of course, economic growth,weather, yields, exchange rates, andpolicies change every year. Thus,the projected agricultural situationwill never line up with what actuallyoccurs. The hope of modelers is thatestimates of the change in produc-tion and market prices caused bybiofuels expansion relative to base-line projections of production andprices are robust to changes in theconditioning assumptions. So even ifthe commodity boom and bust, theworldwide recession, and the major

drought in Australia have movedagriculture away from its projectedpath, modelers assume that theirestimated impact of biofuels on pro-duction and prices remain valid.

One advantage that model-ers have is that their estimates arelargely irrefutable because the worldthat they use to make their projec-tions is never actually observed. Forexample, the expansion of U.S. soy-

bean acreage since 2005 would seemto refute model predictions abouthow U.S. farmers would adjust theiracreage in response to expansion ofcorn ethanol. But we will never knowbecause we cannot re-run history

with lower ethanol volumes. If wecould, it may well be that U.S. soy-bean acreage would have been muchlarger than it actually was, in whichcase the model predictions wouldbe correct. Because model predic-tions cannot be refuted by past data,the credibility of models relies onsubmitting the models and results topeer review, being transparent aboutmodel assumptions and parameters,and putting in place a process bywhich the models reflect the latest

knowledge about agricultural andfood systems.

New Uses for Agricultural ModelsPerhaps economists greatest socialcontribution is their ability to an-ticipate unintended consequencesof seemingly good policy ideas. Aclassic unintended consequence isthe market response of producersand consumers to a price change.When agricultural intervention islarge enough to affect prices, then wemust anticipate that there will be aresponse. And if the affected pricesare for commodities that are traded,then some of the response will occurin other countries. The fact that theworld will respond to a U.S. policythat diverts 30 percent of an expand-ed U.S. corn crop from other uses tobiofuels is not surprising. Predictionsthat expanded biofuels will causeexpansion of cropland are not new.For example, in 1992, researchers at

the Center for Agricultural and RuralDevelopment conducted a study onthe implications of increased cellu-losic biofuels production and con-cluded that higher crop prices in thebiomass scenarios induce a conver-sion of nonagricultural land to cropproduction (Reese et al. 1992).

What are new are legislativemandates to quantify the response ofthe world agricultural system to U.S.

biofuels policy, with severe finan-cial consequences for those biofuelshaving estimates of unintentionalconsequences deemed too great. Themodels that have been employed toestimate changes in domestic and

international crop acreage have nottraditionally been used in a regula-tory context. Rather they have beenused to give policymakers an idea ofthe likely consequences of changesin agricultural and trade policy. Asa guide to policy development andunderstanding, these models haveproved invaluable in facilitating pol-icy agreements. The jury is still outon their use as a regulatory tool.

Economists know that agricul-tural supply curves slope up and that

expanded agricultural productionwill require some additional land.This means that expansion of U.S.biofuels will result in more land be-ing devoted to crop production on anaggregate worldwide basis. How-ever, given all the forces that affectagricultural production decisions, itis impossible to attribute any givenagricultural development project toU.S. biofuels expansion, which is whyCARB and EPA have to rely on mod-

els that attempt to isolate the effectsof U.S. biofuels.The financial stakes involved in

the estimation of land-use changesfrom biofuels have created a largeincentive for interest groups to knowmore about the models and the ap-proaches that are used. Those whoseinterests have been harmed bymodel estimates will have an incen-tive to identify and change modelassumptions and approaches thatwill serve their interests. Given the

lack of data and detailed knowledgeabout exactly how the worlds pro-ducers and consumers will respondto a change in U.S. policy, the modelsused to estimate land-use changesare populated with parameters thatreflect judgment calls, modeler in-sights, and economic wisdom ratherthan hard data. Thus, these models,

Continued on page 1


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Iowa Ag Review

Agricultural Situation

Spotlight

Bruce A. Babcock

[email protected]

The recent sharp drop in com-modity prices has increasedproducer interest in the new

farm bill program called ACRE(Average Crop Revenue Election).If the prices currently indicated bythe futures markets for the 2009crop actually materialize, then

corn, soybean, and wheat farm-ers have a good chance of receiv-ing substantial ACRE payments.Farmers have until August 14 toenroll in ACRE so there is still timefor farmers to determine if ACREis better for them than traditionalfarm programs.

Farmers who sign up for ACREare not eligible for countercycli-cal payments, receive 20 percentlower direct payments, and receivea lower loan rate. Enrollment isthrough the 2012 crop year. Be-cause payments from both ACREand traditional farm programs de-pend on the level of future pricesand yields, it is impossible to saywith certainty that one programor the other will generate morepayments. However, looking at dif-ferent yield and price scenarioscan help farmers make a judgmentabout the odds that enrolling inACRE will provide fruitful returns.

A good place to begin is to look atthe prices used to calculate theACRE guarantees.

State GuaranteesJune USDA projections suggestthat the prices used to set ACREstate guarantees for corn andsoybeans will be $4.20/bu for cornand $10.05/bu for soybeans. The

Odds of an ACRE Payment for Corn and Soybean Farmers

recent drop in prices may affectthese prices by a small amountbecause the ACRE price is the av-erage of the 2007/08 and 2008/09average price received by farmers,and the marketing year for cornand soybeans runs until August 31.Using future prices and historicalbasis, as of July 7, the expected av-erage price for the 2009/10 market-ing year is $3.25/bu for corn and$8.56/bu for corn. Because these

market-indicated prices are so farbelow the ACRE prices, it looks likethe odds are good that ACRE pay-ments could be substantial. How-ever, ACRE guarantees state rev-enue, which is the product of stateaverage yield per planted acre andthe marketing year price. Thus, wemust look at both price and yieldto calculate the odds of a payment.A close look at the Iowa situationshows how this can be done.

The yield used to set the 2009ACRE state guarantees equalsthe average of the state averageyield per planted acre from 2004through 2008 with the highest

and lowest yields eliminated fromthe average. Table 1 provides thefive-year history for Iowa and thesubsequent ACRE yield.

The 2009 ACRE guarantees forIowa equal 90 percent of the prod-uct of the ACRE yield and the ACREprice. For corn this amounts to$650.16 per acre. For soybeans thestate guarantee is $456.77 per acre.Farmers who sign up for ACRE willreceive a payment if the product of

the 2009 actual yield per plantedacre and the 2009/10 season averageprice falls below these levels. Theamount of the per acre payment iscapped at 25 percent of these guar-antees and the per acre paymentis made on 83.3 percent of plantedacres. Farm payments are calcu-lated by multiplying the state ACREpayment by the ratio of farm yieldsto the ACRE yield. Total farm pay-ments are also subject to a $65,000

payment limit plus the 20 percentdecrease in direct payments. If thefarm is at the $40,000 direct pay-ment limit, the effective ACRE pay-ment limit is therefore $73,000.

Table 1. Data used to calculate Iowa ACRE yields

Source: Data are from the National Agricultural Statistics Service.*Acres planted equals harvested acres plus failed acres as measured by the FarmService Agency (FSA).

**FSA rounds soybean yields to the nearest half bushel and corn yields to thenearest bushel.


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Iowa Ag Review

Potential ACRE PaymentsTo see that ACRE has the potentialto generate substantial payments,Figures 1 and 2 show what ACREpayments would be for alternativestate average yields if the 2009/10

marketing year prices turn out to be$3.25 for corn and $8.56 for soy-beans. As shown, if yields are equalto the ACRE yield calculated inTable 1, then corn ACRE paymentswould be almost $75 per plantedacre for corn and about $22 peracre for soybeans. These estimatedpayments account for paymentsbeing made on only 83.3 percent of

planted acres. State average cornyields would have to exceed 200bu/ac to receive no ACRE paymentwith a $3.25 price. Soybean yieldswould have to exceed 54 bu/ac forACRE payments to drop to zero

with a price of $8.56. ACRE can gen-erate a maximum of more than $135per acre for corn and $95 per acrefor soybeans.

A limitation in Figures 1 and 2is that they do not reflect the prob-ability of yield outcomes or uncer-tainty about prices. An early Julyforecast of Iowa yields and nationalprices can provide an estimate of

the odds of receiving an ACRE pay-ment in 2009. Given the late signupdate for ACRE, farmers can updatethese estimates in early August be-fore making a final decision.

Calculating the OddsAs of the second week of July, Iowacrops are off to a great start, with82 percent of corn and 80 percentof soybeans rated good to excel-lent. This is higher than any crophas been rated at this point in thegrowing season since 2003, whenboth crops received the same rat-ing. Of course a good early-July croprating does not guarantee a goodcrop. The 2003 soybean crop was adisaster because of a late drought

and associated pest damage. Andthe state-average corn yield in 2003was 2.5 percent below trend. But agood rating in July does tilt the oddsin favor of a good crop, particularlyif soil moisture is plentiful, as it isthis year.

Iowa trend yields per plantedacre (with a linear trend from 1980to 2008) are 172 bu/ac for corn and49 bu/ac for soybeans. The largesttrend-adjusted yield per plantedacre for corn since 1980 is 193 bu/acwhich occurred in 2004. For soy-beans, 1994 was the best year, witha technology-adjusted yield of 57 bu/ac. For corn, the probability of be-low-trend yields is minimal becauseof the great start to the crop andabundant-to-surplus soil moisturethroughout the state. So a reason-able lower bound on yield may be 12bushels below trend yield for 2009,or 160 bu/ac. For soybeans, dryweather and an outbreak of pests in

August could still cause problems,but it looks like El Nio conditionsare returning, which, combined withabundant soil moisture, suggeststhat a repeat of 2003 is extremelyunlikely. A reasonable lower boundon 2009 yields may be eight bushelsbelow trend, or 40 bu/ac.

We can then construct a prob-ability distribution of yields given

Figure 1. ACRE payments to Iowa corn for various yields if price equals $3.25

Figure 2. ACRE payments to Iowa soybeans for various yields if priceequals $8.56


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Iowa Ag Review

these upper and lower bounds if weset the expected yield for 2009 at180 bu/ac for corn and 53 bu/ac forsoybeans. Figures 3 and 4 presentthe resulting probability distributionof Iowa corn and soybean yields for2009 as of the second week of July.

The figures show the probability that2009 yields will be less than or equalto any yield on the horizontal axis.Thus, for example, there is a 10 per-cent chance that Iowa corn yields willbe less than 170 bu/ac, which meansthat there is a 90 percent chance thatyields will be greater than 170 bu/ac.

The next step is to figure outhow much price uncertainty exists

Figure 3. Probability distribution of 2009 Iowa corn yields

Figure 4. Probability distribution of 2009 Iowa soybean yields

in the market. We can find thisby looking at the price of put andcall options on the Chicago Mer-cantile Exchange. The price of aput option for December corn andNovember soybeans gives a goodindication: the higher the price of

the option, the greater the uncer-tainty. And finally, the correlationbetween Iowa yields and the sea-son-average price needs to be ac-counted for. Market prices alreadyreflect the likelihood of a bumpercrop for both corn and soybeans.If yields turn out to be lower thanexpected, prices will tend to behigher than current levels. If grow-

ing conditions improve even more,then we should see additional priceweakness.

Combining the yield variabilityshown in Figures 3 and 4 and theprice variability revealed by the

price of put options with a reason-able degree of negative correla-tion results in the distribution ofstate revenue for Iowa corn andsoybeans. These distributions areshown in Figures 5 and 6 on page10. The figures show the probabilitythat state revenue will be less thanor equal to any given level. Theyalso show the revenue levels thatwill trigger ACRE payments. Forcorn, there is a 78 percent chancethat Iowa farmers who sign up for

ACRE will receive a payment. Forsoybeans, there is a 55 percentchance. Thus, the odds are goodfor both crops that ACRE will payout in 2009.

With a bit more calculation, thedata shown in Figures 5 and 6 canalso be used to estimate the aver-age size of the payment from ACRE.For corn, when ACRE pays out,the average payment is about $80.For soybeans, the average payoutis $40 per acre. Multiplying theseaverage payouts by the probabilityof a payout results in the overall ex-pected or average payout. For corn,farmers should expect to see about$62 per planted acre. For soybeans,the expected payout is about $22per acre.

Iowa farmers must give up 20percent of their direct paymentsto participate in ACRE. Acrosscorn and soybeans, this amountsto about $4.40 per planted acre.

Weighting the corn and soybeanexpected ACRE payments by 2009planted acreage gives an overall ex-pected ACRE payment across cornand soybeans for 2009 of $45, whichis 10 times as large as what farmersare being asked to give up in directpayments. This suggests that thehigh odds of receiving an ACRE pay-ment in 2009 can compensate farm-


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Figure 6. Distribution of Iowa soybean revenue

Figure 5. Distribution of Iowa corn revenue

ers for their loss in direct paymentsover the life of the farm bill.

What Should Farmers Do?The signup rules for ACRE allowfarmers to wait until August 14 to

decide whether ACRE makes sensefor them. By the first week of August,farmers will have more informationabout 2009/10 marketing year prices,the condition of the 2009 crop, andfinal ACRE guarantee levels. There-fore, they will have more informationabout the potential size of ACRE pay-ments. If corn prices stay in the low$3.00 range and soybean prices staybelow $8.50, then ACRE becomeseven more of a sure bet than is indi-cated by the early July calculations.

If for some reason corn and soybeanprices increase dramatically andcrop conditions do not deteriorate,then perhaps waiting until next yearwould be a better bet.

Producers who do not want towait until August to enroll in ACREcan rest reassured that if marketprices unexpectedly increase and noACRE payment is triggered in 2009,this increase in market price willprovide them with a high guarantee

for their 2010 crops because the 2010guarantee will be based on marketprices received in the 2008/09 and2009/10 marketing years. Odds aregood that in at least one year over thenext four, Iowa farmers will receivemore in ACRE payments than theywill give up in direct payments overthe life of the farm bill.


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Iowa Ag Review

dairy farms that produce the equiva-lent of five tons of CO2 reductions per

year per cow. At a price of $20 perton, this generates $100 per cow peryear. Of course, any net benefit ornet cost of using and capturing themethane must be added or subtract-ed from this $100. For comparison,the same cow may produce 20,000pounds of milk per year, which gener-ates perhaps $1,000 per year in milkrevenue in excess of feed costs at amilk price of $15 per hundredweight.

Is Agriculture a Net Winner orLoser from a Carbon Cap-and-Trade Policy?If the United States adopts a cap-and-trade policy to combat climatechange, the negative impacts on agri-culture will likely be relatively small,particularly if agricultural emissionsremain uncapped. Once companies

Costs and Benefits to Agriculture from

Climate Change PolicyContinued from page 3

here and abroad have a profit incen-tive to find low-cost ways to reducegreenhouse gas emissions, it isdoubtful that carbon dioxide priceswill rise high enough to dramaticallyincrease agricultural production

costs. If other major agricultural pro-ducers also face increasing produc-tion costs because their countriesadopt carbon-reducing policies, thenU.S. producers will not lose theircompetitive advantage. Furthermore,if production costs do rise significant-ly, and if most of the worlds farmersface these higher production costs,then most, if not all, of the highercosts will soon be reflected in highercommodity prices that will compen-sate farmers for their higher costs.

Similarly, the benefits from pro-viding carbon offsets to capped sec-tors of the economy will be modest aswell. Benefits will accrue as more cropfarmers will move to no-till farming,and a price for carbon will enhancethe economics of methane recoverysystems in livestock operations.

Given the likelihood of modestcosts and benefits from a cap-and-trade system, perhaps agricultureshould look at whether a cap-and-trade policy will change growingconditions for the better or worse as

a deciding factor in whether to sup-port a change in policy. Given howmuch irrigated agriculture in theWest relies on consistent mountainsnowfall and Corn Belt agriculturerelies on warm summers with abun-dant rainfall, any disruptive changein climate will have a far greaterimpact on livelihoods than will theprice of carbon.

Work CitedGellings, Clark W., and Kelly E. Par-

menter. 2004. Energy Efficiency inFertilizer Production and Use, inEf-

ficient Use and Conservation of Energy(Eds. C. Gellings and K. Blok), in

Encyclopedia of Life Support Systems(EOLSS), UNESCO, EOLSS Publish-ers, Oxford, UK.

Measuring Unmeasurable Land-Use

Changes from Biofuels

Continued from page 6

like most economics models, are ripeground for aggrieved parties.

As we look to agriculture and for-estry as a means of offsetting carbonat low cost, the demand for economicmodels of land use will increase.If greater investment in data andknowledge of agriculture around theworld occurs, then the precision with

which these models can estimate theimpact of biofuels on the quantity ofland brought into production, wherethe land-use expansion will occur,what the land will be planted to, andhow the new lands will be managedwill only improve.

Editors NoteResearchers in the Center for Agri-cultural and Rural Development at

Iowa State University have workedfor the last 18 months with EPA staffand other academic modelers atTexas A&M University and PurdueUniversity to estimate the impactson agriculture from expanded biofu-els. EPA staff then used the resultsof this analysis in their life cycle as-sessment of biofuels.

Works CitedHertel, Thomas W., Alla A. Golub,Andrew D. Jones, Michael OHare,

Richard J. Plevin, and Daniel M. Kam-men. 2009. Comprehensive GlobalTrade Analysis Shows SignificantLand Use Change GHG Emissionsfrom U.S. Maize Ethanol Production.Manuscript, Center for Global TradeAnalysis, Purdue University.

Reese, Randall A., Sateesh V. Arad-hyula, Jason F. Shogren, and K.Shaine Tyson. 1992. Biomass as Sus-

tainable Energy: The Potential andEconomic Impacts on U.S. Agricul-ture. CARD Working Paper 92-WP92, April 1992, Center for Agricul-tural and Rural Development, IowaState University.

Tokgoz, Simla, Amani Elobeid, Jacin-to F. Fabiosa, Dermot J. Hayes, BruceA. Babcock, Tun-Hsiang (Edward)Yu, Fengxia Dong, Chad E. Hart, andJohn C. Beghin. 2007. EmergingBiofuels: Outlook of Effects on U.S.

Grain, Oilseed, and Livestock Mar-kets. CARD Staff Report 07-SR 101,July 2007, Center for Agriculturaland Rural Development, Iowa StateUniversity.


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Recent CARD PublicationsWorking PapersHydrologic Simulations of the Maquoketa

River Watershed Using SWAT. Manoj Jha.June 2009. 09-WP 492.

Sensitivity of Carbon Emission Estimatesfrom Indirect Land-Use Change. JeromeDumortier, Dermot J. Hayes, MiguelCarriquiry, Fengxia Dong, Xiaodong Du,Amani Elobeid, Jacinto F. Fabiosa, and Simla

Tokgoz. July 2009. 09-WP 493.

Speculation and Volatility Spillover in theCrude Oil and Agricultural CommodityMarkets: A Bayesian Analysis. XiaodongDu, Cindy L. Yu, and Dermot J. Hayes. May2009. 09-WP 491.

Towards an Integrated Global AgriculturalGreenhouse Gas Model: GreenhouseGases from Agriculture Simulation Model(GreenAgSiM). Jerome Dumortier and

Dermot J. Hayes. May 2009. 09-WP 490.

measuring unmeasurable land-use changes from biofuels

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