Impact Of Developing Biodiesel In U.S. On China's Soybean Market

The world food security is confronted with a new situation of food-based biofuel booming worldwide. On the one hand, the developed countries are accelerating the food consumption by developing biofuel. On the other hand, developing countries are promoting food production, some of which depend on importing.The soybean market of China is faced with the similar situation. Although, Chinese government started subsidy policies on soybean production in 2002, still, 50% of the total consumption of soybean depends on import. America is one of the biggest soybean exporters of China. Before 2005, the quantity imported from US accounted for over fifty percent of China's total import. Even after 2005, US shared one third market in China's soybean import. Meanwhile, China is the largest importer of US's soybean. The reason for China importing a mass of soybean from US is not only that the domestic production can not satisfy the increasing demand, but also that the subsidy polices of soybean in US make US a strong competitor in world soybean market.However, the soybean market is confronted with new situation that the US develops biodiesel using soybean as feedstock. The development of soybean-based biodiesel in US would have impact on China's soybean market through trade. This study attempts to analyze the potential impact of US developing soybean-based biodiesel on China's soybean market.In a game, when both players make decisions, the action adopted by players will influence each other. The rational government will choose the optimal policy to maximize its payoff. Chinese government will act positive to US's action. A game-theoretical model is used to simulate the results of policy interaction. An econometric model and political preference function are incorporated into difference game model to do the scenario-based simulation in this study.The parameters in supply, demand and trade model are estimated in SAS system using ordinary least squares (ols) and two-stage least squares (2sls). Most of the estimated parameters are significant given the level of significance. There are no autocorrelation and heteroscedasticity in all the models. The models simulate the data well over the historical period and fit to predict.Political preference function is used as the payoff function. It is an addictive weighed function including producer welfare, consumer welfare and government welfare. Political weights are derived through revealed preference method. The results show that Chinese government has more preference on producer in soybean market. The average weights of recent 10 years are used in the simulation. The political weight of Chinese soybean producer is 1.11 and consumer is 0.89. The political weight of US soybean producer is 1.34. The estimated parameters and political weights are incorporated into the difference game model to do simulated analysis. The base year is 2005, which is the milestone of US biodiesel production and the year of the 2005 Energy Policy Act started. The base scenario is set that there are no positive actions in both China and US, which means that there are no any subsidy policies in both countries. Additionally, the production of biodiesel in US is set zero. The results under the base scenario are obtained in GAMS. The simulated policy scenarios of US are marketing loan program(ML), direct payment program(DP), combination of marketing loan program and direct payment program(MLD), combination of marketing loan program, direct payment program and counter-cyclical payments(MLDC). The simulated policy scenarios of China are subsidizing 1/3 of total planted acreage (SP1), subsidizing 2/3 of total planted acreage (SP2) and subsidizing total planted acreage (SP3). The scenario analysis is conducted in two situations, which are no development of biodiesel in US and 10% of production of soybean are used to produce biodiesel in US. Nash equilibrium is obtained through iterated elimination of weak dominated strategies.The equilibrium results of two situations are compared under alternative US actions. It turns out that the production of soybean in China will increase and the consumption of soybean will decrease under alternative US actions with US developing soybean-based biodiesel. And all the equilibrium total welfare and producer welfare in soybean market will increase, while all the consumer welfare will decrease. The government welfare will decrease except under the DP equilibrium.Under the situation of no development of biodiesel in US, the Nash equilibrium policies are MLD of US and SP3 of China. Under the assumption of 10% of production of soybean used to produce biodiesel in US, the Nash equilibrium policies are also MLD of US and SP3 of China. All the simulations are conducted in GAMS.The Nash equilibrium production of soybean in China will decrease by 6.12% and the consumption will increase by 8.88% under the situation of no development of biodiesel in US compared with the base scenario. Under the assumption of 10% of production of soybean used to produce biodiesel in US, the equilibrium production will decrease by 5.50% while the consumption will increase by 8.40% compared with the base scenario. The equilibrium production will increase by 0.66% and the equilibrium consumption will decrease by 0.44% under the situation of US developing biodiesel when compared with no development biodiesel in US. The soybean import from US under two situations will increase 42.79% and 28.29% respectively, and the import under developing biodiesel will decrease by 10.15% compared with the situation of no development of biodiesel. Compared with the base scenario, the total welfare will decrease under both the situations. Under the situation of no developing biodiesel in US, the total welfare of China will decrease by 27.24%, of which the producer welfare will decrease by 37.54%, the consumer welfare will increase by 14.47% and the government welfare will decrease by 96.35%. Under the situation of developing biodiesel in US, the total welfare of China will decrease by 26.81%, of which the producer welfare will decrease by 21.81%, the consumer welfare will increase by 4.83% and the government welfare will decrease by 97.40%. The results show that the total welfare will increase by 0.59%, of which producer welfare will increase by 25.19%, the consumer welfare will decrease by 8.42% and the government welfare will decrease by 28.27% under the situation of 10% soybean production used to produce biodiesel in US, compared with the situation of no development of biodiesel in US.The results show that the subsidies of soybean in US have tremendous impact on soybean market of China under both the situations by comparing the Nash equilibrium results of the two situation and the base scenario results. The subsidies of soybean in US restrain the soybean production in China and damage on the total welfare and producer welfare of China. Compared with the equilibrium results under the situation of no developing biodiesel in US, US developing biodiesel will increase the total welfare in soybean market of China due to the increase of soybean producer welfare, and the production of soybean will increase while the consumption will decrease.It turns out that the optimal policy of China is subsidizing the whole planted acreage of soybean whatever US develops biodiesel or not. Therefore, China is supposed to enlarge the subsidized acreage, work out more subsidies and promote the domestic production to against the bad impact brought by US soybean subsidies and the situation of US developing biodiesel. If necessary, Chinese government should institute proceedings of US subsidies to the WTO according to the WTO rules, to protect the soybean producer welfare from damage brought by US subsidy policy.