Crushing dynamics module

The crushing dynamics (CD) module assesses market dynamics in the crushing sector. This module estimates the supply response of the aggregated AR crusher and AR soybean producer to demand and price changes of soybean, oil and meal. The module generates three main

outputs (Table 5-3). Simulated variables endogenously determine the producer price of each soybean product.

Table 5-3. Outputs and simulated variables of the CD module.

Outputs Units Symbol Equation

Soybean production ton/year

sp soy

q Eq. 4-16

Soybean producer price US$/ton

sp soy

P Eq. 4-18

Soybean oil price to the biodiesel producer US$/ton

bp oil

P Eq. 4-34

Simulated variables Units Symbol Equation

Crush margin US$/ton gcr Eq. 4-26

Soybean supply for crush ton/year

cr soy

q Eq. 4-25

Soybean oil production ton/year

cr oil

q Eq. 4-23

Soybean meal production ton/year

cr meal

q Eq. 4-24

Soybean, oil and meal exports ton/year

exp

o

q Eq. 4-6

Soybean, oil, meal international price US$/ton Po Eq. 4-5 AR Soybean, oil, meal international demand ton/year

c o

q Eq. 4-4

The quantity of soybean production is used in the LCS module to allocate dLUC from soybean production for biodiesel. The soybean producer price is linked to the LCS module to estimate the soybean land unit profit. The soybean oil producer price is linked to the BM module to estimate the soybean oil price to the biodiesel producer.

The simulation procedure of the CD module is described as follows (Figure 5-3). The production of soybeans, the soybean producer price and the soybean oil price to the biodiesel producer are iteratively simulated based on the evolution of the values of the policy instruments and the external factors and the simulated variables over time, until the final time (T) of the simulation.

Given the evolution of external factors and the given international price, the international demand for AR soybean, oil and meal is defined; then, the current supply of soybean at this price level is simulated. Soybean supply is then allocated between market destinations based on soybean demand for crush. The quantity of soybean oil exports is then simulated based on the domestic supply of soybean oil for biodiesel production. Finally, the new price level is found based on the intersection of the AR supply curve and the international demand curve for soybean oil and meal respectively. In the next simulation step (t+1), the new demand and supply levels are simulated based on this new price level and the evolution of demand for soybean oil and meal.

SIMULATION MODEL

Set policy scenario § Soybean, oil, meal

export tax

Set external factor scenario § Soybean, oil, meal yield trend

§ Soybean, oil, meal international demand trend § Soybean, oil, meal international price trend § Non-feedstock production cost

Simulate international demand for oil and meal

Simulate soybean production

Allocate soybean production by market destination

Simulate soybean oil and meal export supply Find oil and meal international price get soybean land supply End t=T? yes

Simulate soybean oil and meal production

get average soybean yield t=t+1

t=t0 Set initial conditions

get soybean oil demand for biodiesel

Simulate international demand for soybean

Find soybean international price

no

Figure 5-6. Simulation procedure of the CD module.

Two negative balancing feedback loops regulate the price adjustment mechanism based on changes in the supply by the aggregated producer and the demand by the aggregated final consumer for AR soybean products in the international market. This generic feedback structure is applied to each product in the crushing sector (Figure 5-7). Consequently six negative feedback loops are identified in the crushing dynamics module, grouped in two types:

§ B4, B5, B6: Soybean, oil and meal AR export supply adjustment § B7, B8, B9: Soybean, oil and meal international demand adjustment

In the crusher dynamics module, these loops work as follows. If the international demand for soybean oil and meal increases ceteris paribus, the international price of each product increases given the current supply by the AR producer. Raising soybean oil and meal prices drive an increment in the crush margin and consequently in the quantity of soybean diverted to crush. Soybean supply for crush also adjusts to the supply and demand balance of soybean in the international market.

Raising soybean supply for crush increases soybean oil and meal production and, ceteris paribus, reduces the export of soybeans on the other hand. Analogously to soybean oil and meal prices, the soybean international price adjusts also to changes in structural factors and

and meal supply increase, in the absence of other changes, the export of these products also increases. In this context the allocation of soybean oil for biodiesel production reduces soybean oil exports. The soybean oil international price consequently rises to increase soybean oil exports. As the export supply increases, prices are bid downwards.

soybean production AR meal international demand soybean international price AR soybean international demand AR oil international demand + - AR soybean export supply - B4 B7 B6 B8 B5 B9 soybean supply for crush + - + AR meal export supply + meal international price + - - + AR oil export supply oil international price + - + - oil for biodiesel

supply

+ -

Figure 5-7. Feedback loops in the CD module.

In conclusion, loops B4, B5 and B6 adjust the production level of the aggregated AR producer based on the effect of price on the producer unit profit and loops B7, B8 and B9 adjust the international demand level for AR soybean products based on the effect of price on consumer utilities. These two negative feedback loop types cause price to adjust until, in the absence of further external shocks, the market reaches equilibrium with production equal to consumption. The crush margin adjusts with a delay needed to form expectations and make a decision. Oil and meal production adjust with a delay caused by the time need for instance, to adjust the capacity utilisation and the installed capacity. Soybean production adjusts with a delay given by the time need to form land profit expectation and decide on the desired quantity of land diverted to soybeans.

In the crushing dynamics module, the critical stock and flow structure is the price formation structure and its effect on AR supply of soybean products (Figure 9-5). International prices are modeled as stocks. Soybean, oil, and meal international prices adjusts to the indicated international price through goal seeking structures (Sterman 2000). Discrepancies in the supply-demand balance are solved by adjusting the price levels of each product based on the supply response of the AR firm and the demand level of the AR product in the international market.

SIMULATION MODEL