Ethanol, Corn, and Soybean Price Relations in a Volatile Vehicle-Fuels Market

Luanne Lohr,Michael Wetzstein,Cesar Escalante,Zibin Zhang

doi:10.3390/en20200320

Luanne Lohr, Michael Wetzstein

Open Access

https://doi.org/10.3390/en20200320

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Abstract

The rapid upward shift in ethanol demand has raised concerns about ethanol’s impact on the price level and volatility of agricultural commodities. The popular press attributes much of this volatility in commodity prices to a price bubble in ethanol fuel and recent deflation. Market economics predicts not only a softening of demand to high commodity prices but also a positive supply response. This volatility in ethanol and commodity prices are investigated using cointegration, vector error corrections (VECM), and multivariate generalized autoregressive conditional heteroskedascity (MGARCH) models. In terms of derived demand theory, results support ethanol and oil demands as derived demands from vehicle-fuel production. Gasoline prices directly influence the prices of ethanol and oil. However, of greater significance for the fuel versus food security issue, results support the effect of agricultural commodity prices as market signals which restore commodity markets to their equilibriums after a demand or supply event (shock). Such shocks may in the short-run increase agricultural commodity prices, but decentralized freely operating markets will mitigate the persistence of these shocks. Results indicate in recent years there are no long-run relations among fuel (ethanol, oil and gasoline) prices and agricultural commodity (corn and soybean) prices.

Highlights

The rapid upward shift in ethanol demand has raised concerns about ethanol’s impact on the price level and volatility of agricultural commodities
In terms of derived demand theory, our results support the notion of ethanol and oil demands as derived demands from vehicle-fuel production
Gasoline prices directly influence the prices of ethanol and oil

Summary

Introduction

The rapid upward shift in ethanol demand has raised concerns about ethanol’s impact on the price level and volatility of agricultural commodities. These questions are addressed with an analysis of weekly price series for U.S ethanol, corn, soybean, petroleum-based gasoline (gasoline), and oil. The relationships among these series are investigated using cointegration, vector error corrections (VECM), and multivariate generalized autoregressive conditional heteroskedascity (MGARCH) models. Significant lead time is required in order to bring additional domestic ethanol supplies to market and foreign supply is restricted with a 54¢ per gallon import tariff This has contributed to the recent boom in ethanol refining and associated increase in ethanol price volatility. Series for the pre-ethanol and ethanol boom periods for the prices of ethanol, corn, soybeans, gasoline, and oil are tested for the presence of a unit root. *, **, and *** denote significance at a 1%, 5%, and 10% level, respectively, and L denotes the lag length

Cointegration Estimation

Variance-Decomposition

Impulsee Response

MGARCH

Findings

Conclusions