The Dynamics of Supply: US Corn and Soybeans in the Biofuel Era

We estimate U.S. corn and soybean supply responses by exploiting the large exogenous price variations associated with implementation of the Renewable Fuel Standard. We focus on recent years and on the 12 U.S. midwestern states and estimate a system of dynamic equations that is consistent with the role of crop rotation. Corn and soybean acreages respond more in the short run than in the long run. Cross-price elasticities of acreage responses are negative and fairly large in absolute value such that, when corn and soybean prices move together, the response of total acreage allocated to these two crops is extremely inelastic.