The Renewable Fuel Standard mandates in the Energy Independence and Security Act of 2007 will require 36 billion gallons of ethanol to be produced in 2022. The mandates require that 16 of the 36 billion gallons must be produced from cellulosic feedstocks. The potential land use implications resulting from these mandates were examined using two methods, the POLYSYS model and a general equilibrium model. Results of the POLYSYS analysis indicated that 72.1 million tons of corn stover, 23.5 million tons of wheat straw, and 24.7 million acres would be used to produce 109 million tons of switchgrass in 2025 to meet the mandate. Results of the CGE analysis indicated that 10.9 billion bushels of corn grain, 71 million tons of corn stover, and 56,200 tons of switchgrass is needed to meet the mandate.

While agricultural economics literature has become rife with the economics of ethanol production and cellulosic ethanol feedstock production, little has been written about capital investment necessary for the magnitude of industry development mandated by the Energy Security and Independence Act of 2007. Financing the development of the ethanol industry to meet the 36 billion gallon production capacity set for 2022 (with 16 billion gallons from cellulosic ethanol) will require capital investments exceeding $100 billion for production facilities, plus extensive investment in feedstock establishment and transportation/handling infrastructure. Federal support associated with political mandates does not address all of the financial issues related with the development of the industry in such a relatively short timeframe. This article addresses the challenges associated with and the conditions necessary for achieving the private investment needed to expand the ethanol industry in the United States.

We examined four evolution paths of the biofuel sector using a partial equilibrium world agricultural sector model in CARD that includes the new RFS in the 2007 EISA, a 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. The third scenario considers a pure market force driving ethanol demand growth because of the high energy price, while the last is a policy-induced shock with removal of the biofuel tax credit when the energy price is high. Standard results hold where the biofuel sector expands with higher energy price, raising the prices of most agricultural commodities through demand side adjustment channels for primary feedstocks and supply side adjustment channels for substitute crops and livestock. On the other hand, the biofuel sector shrinks coupled with opposite impacts on agricultural commodities with the removal of all support including the tax credit. Also, we find that given distribution bottlenecks, cellulosic ethanol crowds marketing channels resulting in a corn-based ethanol price that is discounted. 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.

The effects of biofuel production on commodity prices and their transmission to retail food prices are discussed. Factors driving higher commodity prices are tight global supplies and increased demand of corn ethanol in the short term. Evidence suggests that higher corn prices contribute to food price inflation for some food items. These include eggs, poultry, pork, beef and milk. The findings imply that food price inflation for these items is related to increased production of corn ethanol, primarily because of high oil prices. Higher oil prices also increase fuel and energy costs, which increase marketing costs for all food categories.

Exchange rates have long been thought to have an important impact on the export and import of goods and services, and, thus, exchange rates are expected to influence the price of those products that are traded. At the same time, energy impacts commodity production in some very important ways. The use of chemical and petroleum derived inputs has increased in agriculture over time; the prices of these critical inputs, then, would be expected to alter supply, and, therefore, the prices of commodities using these inputs. Also, agricultural commodities have been increasingly used to produce energy, thereby leading to an expectation of a linkage between energy and commodity markets. In this paper, we examine the price relationship through time of the primary agricultural commodities, exchange rates, and oil prices. Using overlapping time periods, we examine the cointegration relationship between prices to determine changes in the strength of the linkage between markets through time. In general, we find that commodity prices are linked to oil for corn, cotton, and soybeans, but not for wheat, and that exchange rates do play a role in the linkage of prices over time.

The effects of the U.S. dollar exchange rate versus the Mexican peso are evaluated for four traded nonfarm-produced inputs (fertilizer, chemicals, farm machinery, and feed) in the U.S. Unit root tests suggest that the exchange rate and the four input price ratios support the presence of unit roots with a trend model but the presence unit roots can be rejected in the first difference model. This result is consistent with a fixed price/flex price conceptual framework, with industrial prices more likely to be unresponsive to the exchange rate than farm commodity prices.

This study examines the short- and long-run effects of changes in macroeconomic variables—agricultural commodity prices, interest rates and exchange rates—on the U.S. farm income. For this purpose, we adopt an autoregressive distributed lag (ARDL) approach to cointegration with quarterly data for 1989–2008. Results show that the exchange rate plays a crucial role in determining the long-ran behavior of U.S. farm income, but has little effect in the short-run. We also find that the commodity price and interest rate have been significant determinants of U.S. farm income in both the short- and long-run over the past two decades.

These three invited papers examine the role that exchange rates may have in influencing commodity prices, input prices and farm income. The papers arguably represent one of the most important recent attempts to quantify and explain these new linkages. As U.S. and world agriculture moves from a period of high output prices to a period of lower prices, understanding the impact of macroeconomic variables on farm input costs and farm income will become more important. Further, it will be equally important for policy makers to undertake appropriate market interventions in order to have maximum effectiveness should this period of cost-price-squeeze continue to intensify. Each of the papers has something significant to contribute to the understanding and debate of these new linkages between agriculture, the macroeconomic environment, and the energy sector.