The Effect of Biodiesel Policies on World Biodiesel and Oilseed Prices

Abstract

A theoretical and empirical model is developed to analyze the effect of a biodiesel mandate, a tax exemption (tax credit) and an exogenous diesel price shock on world soybean and canola markets. The jointness in crushing oil and meal from the oilseed reduces the size of the link between biodiesel and oilseed prices. A diesel price shock with a mandate results in a smaller change in oilseed prices compared with a tax exemption. Higher diesel prices increase biodiesel prices under a tax exemption but lower them with a blend mandate. When both canola and soybeans are used to produce biodiesel, an increase in the diesel price leads to higher canola prices, but the effect on soybean prices is ambiguous and depends on relative elasticities of meal demand and canola supply because canola produces more oil than soybeans.