Development of Corn Stover Biofuel: Impacts on Corn and Soybean Markets and Land Rotation

This paper first develops a partial equilibrium (PE) model to examine impacts of converting corn stover to biofuel on markets for corn and soybeans at the national market level. The PE model links gasoline, corn ethanol, dried distiller grains, corn, soybeans, and soybean meal markets in the presence and absence of a viable market for corn stover. The model also includes a technology which converts corn stover to bio-gasoline (a drop-in biofuel). The model evaluates profitability of the ethanol and bio-gasoline industries and assumes that these industries will expand/contract until profits reach zero. Given these assumptions and according to the predetermined supply and demand elasticities, the model determines equilibrium prices and their corresponding quantities for given exogenous variables defined in the model (such as crude oil price). The model is calibrated using data obtained for 2010 for USA economy and then solved for alternative crude oil prices in the presence and absence of a fixed subsidy of $1.01per gallon of bio-gasoline produced. Then we used the Purdue Crop Linear Programing (PCLP) model to assess farmers’ reactions to market equilibrium prices for corn, soybeans, and corn stover in the presence of a viable market for corn stover. The PCLP model determines profit-maximizing decisions for a given farm given its existing resources and estimated prices of commodities and input costs. We tuned the PCLP model according to the market clearing prices obtained from the PE model for a case when the crude oil price is $100 per barrel. Then using the tuned PCLP model we determined the optimum land allocation options for farmers. The partial equilibrium analyses show that: 1) with no bio-gasoline subsidy a limited amount of corn stover will be converted to biofuel even at very high crude oil prices; 2) The bio-gasoline subsidy could significantly boost production of this biofuel in particular at medium and higher crude oil prices; 3) no more than 45% of available corn stover will be removed for biofuel production; 4) converting corn stover to bio-gasoline boosts corn production, increases corn-corn rotation, and decreases supply of soybeans; and 5) converting corn stover to bio-gasoline changes the soybean to corn price ratio in favor of soybeans, at least in the very short term. The results obtained from the PCLP model show that the farm level land allocation decision is sensitive to the profitability of corn stover processing activities. When corn stover removal is introduced as a new option under the base case scenario at a corn stover price of $111 per ton) farmers allocate about 66% of their land to the corn-corn rotation and remove stover from their land. In this case corn stover is removed from 78.2% of available land at a rate of 1.18 tons per acre. If corn stover is demanded for biofuel production, then a major shift will be observed in crop rotations.