The principal objective of the present study is to look at the economics of biofuel production and the likely impacts of an expected growth in biofuel-related demand for agricultural products on commodity markets. It describes the economics and policies in biofuel markets by bringing together available information on production technologies, costs and policy measures in major biofuel producing countries. Additionally based on assumptions where data are missing, production costs are calculated for the year 2004 (the base year for the impact analysis below) and compared across countries and production processes as well as with oil-based fuel prices to show the relative competitiveness of biofuel production.

Impacts on agricultural markets are analysed using the OECD partial equilibrium model for temperate zone agricultural commodities, Aglink, in connection with the FAO-counterpart, Cosimo, and the OECD World Sugar Model. A number of modifications are made to the models to allow for this type of analysis, as well as to model the impact of changes in crude oil prices on agricultural production costs. Model results of a set of scenarios are compared in order to identify the specific impacts of expected growth in biofuels production as well as those of changes in world crude oil prices.