As biofuel production has increased—particularly ethanol
derived from corn—a hotly contested competition for feedstock supplies has
emerged between the agricultural grain markets and biofuel refineries. This
competition has sparked concern for the more fundamental issue of allocating
limited farmland resources, which has far-reaching implications for food
security, energy security, and environmental sustainability.
Numerous studies of land use, food prices, environmental
impact, and more have fed the so-called “food versus fuel” debate. However,
according to new models created by University
of Illinois researchers,
most studies so far have overlooked a key factor: selfish and possibly
competing interests of the biofuel industry and individual farmers, who
independently seek the most profit from their crops.
“We looked at competition among farmers and between the
refinery and the food market and put them into one model to optimize the whole
system,” said Yanfeng Ouyang, a professor of civil and environmental
engineering. “A lot of researchers now working on biofuel supply chain
optimization have not been able to develop a holistic model that can address
such complex interactions among multiple stakeholders in a comprehensive
framework.”
Most such studies have assumed that farmers act collectively
or in corporation, but in reality each farmer is competing for his own market
share. Farmers individually have a choice to sell to the grain market, to the
refineries or to some combination of the two, based on the price at each outlet
and the cost of transportation. Furthermore, refineries have finite capacities,
so farmers are competing with each other to sell to them. The grain market,
too, has its limits: If the grain market is flooded with excess corn, prices
drop. In turn, refineries can then offer lower prices for ethanol corn.
“At the end of the day, how much a farmer produces to sell
to the market depends on the market price of the corn,” said Jong-Shi Pang, the
Caterpillar Professor and the head of industrial and enterprise systems
engineering at the U. of I. “The farmers need to take into account what the
refinery is offering to them but at the same time also be mindful of their
production. The amount sold to the market determines the price on the market,
which in turn influences everyone’s production. That’s the kind of
decision-making problems that all the players have to resolve.”
Taking these complicated competing interests into account,
the U. of I.
team developed models of the system, using corn production and sales in Illinois as a case
study. They published their findings in Energy
Economics.
The researchers applied the models to various business
scenarios; for example, farmers cooperating with the biofuel industry through
farmland leasing or acquisition. The estimated improvement in overall system
profit can provide guidelines for how much effort stakeholders should invest to
achieve such business scenarios.
The models provide guidelines for optimizing the biofuel
supply chain—where to place biorefineries and what capacities to assign them to
maximize profit. The researchers considered the delicate balance such
refineries must strike: Pay the farmers enough to persuade them to sell, but
not so much that it cuts into their own profits. Location and price are two
important factors guiding a farmer’s decision to sell to the refinery.
The researchers also used their models to quantitatively
evaluate the effect on farmers and food prices when a biofuel supply chain is
introduced to a market. They found that diverting some of the corn crop to
ethanol affects food prices to varying degrees. However, the overall system
welfare improved, with farmers being the primary beneficiaries.
“We do see that the competition is likely to bring benefit
to the farmers,” Ouyang said. “The farmers used to have to sell to the grain
markets; now they have more alternatives. They can do further bidding and
negotiating.”
The researchers will continue to refine their models, adding
additional considerations such as environmental impact, production
fluctuations, land-use diversity and crop rotation. They also hope to design
mechanisms to drive self-interested stakeholders toward socially desirable
business practices.
