Price Transmission in the US Ethanol Market
We use nonlinear time series models to assess price relationships within the US ethanol industry. Daily ethanol, corn, and crude oil futures prices observed from mid-2005 to mid-2007 are used in the analysis. Our results suggest the existence of an equilibrium relationship between the three prices studied. Only ethanol prices are found to adjust to deviations from this relationship. The evolution of ethanol prices in relation to corn and crude oil prices may have important implications for the long-run competitiveness of the US ethanol industry.
KeywordsFuture Price Cointegration Relationship Price Transmission Ethanol Industry Corn Price
The authors gratefully acknowledge financial support from Instituto Nacional de Investigaciones Agrícolas (INIA) and the European Regional Development Fund (ERDF), Plan Nacional de Investigación Científica, Desarrollo e Innovación Tecnológica (I+D+i), Project Reference Number RTA2009-00013-00-00.
- CME Group (2007) Ethanol Derivatives, Key Charts and Data. Available at http://www.cbot.com/cbot/docs/87237.pdf
- Energy Information Administration (EIA) (2007) US Energy Information Administration Before the Committee on Agriculture. Testimony of Dr. Howard Gruenspecth Deputy Administrator. Available at http://www.eia.doe.gov/neic/speeches/howard101807.pdf
- Koplow D (2006) Biofuels – at what cost? Government support for ethanol and biodiesel in the United States. International Institute for Sustainable Development, Geneva, Switzerland. Available at http://www.globalsubsidies.org/article.php3?id_article=6.
- OECD, Directorate for Food, Agriculture and Fisheries, Committee for Agriculture (2006) Agricultural Market Impacts of Future Growth in the Production of Biofuels. Paris. Available at http://www.oecd.org/LongAbstract/0,2546,en_2649_33727_36074136_119666_1_1_1,00.html.
- Rajagopal D, Zilberman D (2007) Review of environmental, economic and policy aspects of biofuel production and use. Policy Research Working paper 4341, The World Bank, Washington DC.Google Scholar
- Rapsomanikis G, Hallam D (2006) Threshold cointegration in the sugar-ethanol-oil price system in Brazil: Evidence from nonlinear vector error correction models. FAO Commodity and Trade Policy Research Papers 22, FAO, Rome. Available at http://www.fao.org/es/esc/en/41470/41522/highlight_110345en.html.
- Renewable Fuels Association (2009) Industry Statistics. Available at http://www.ethanolrfa.org/objects/pdf/outlook/outlook_2006.pdf.
- Saikkonen P, Luukkonen R (1988) Lagrange multiplier tests for testing non-linearities in time series models. Scandinavian J Stat 15: 55–68.Google Scholar
- Schmidhuber J (2006) Impact of an increased biomass use on agricultural markets, prices and food security: A longer-term perspective. Paper presented at the International Symposium of Notre Europe, Paris, 27–29 November.Google Scholar
- Shapouri H, Gallagher P (2005) USDA’s 2002 Ethanol Cost-of-Production Survey. Agricultural Economic Report 841, U.S. Department of Agriculture, Washington D.C. Available at http://www.ethanolrfa.org/objects/documents/126/usdacostofproductionsurvey.pdf.
- United States Department of Agriculture (2008) USDA Agricultural Projections to 2017. Projections Report OCE-2008-1, Washington DC. Available at http://www.ers.usda.gov/Publications/OCE081/OCE20081fm.pdf
- Westcott P C (2007) Ethanol expansion in the United States. How will the agricultural sector adjust? U.S. Department of Agriculture, Economic Research Service, Washington DC. Available at http://www.ers.usda.gov/Publications/FDS/2007/05May/FDS07D01/