Price Discovery and Risk Management in the U.S. Distiller’s Grain Markets

Abstract

In this paper, we evaluate the spatial nature of the price discovery process in regional distiller’s grain markets in the US and the price relationships among distiller’s grains, corn, and soybean meals since the beginning of the biofuel boom. We use multivariate and pairwise cointegration analyses to examine spatial integrations among regions and to investigate whether a stable long-term price relationship exists in the market. Error correction models are estimated to determine the speed of price adjustment to the long-run spatial equilibrium in the distiller’s grain market. Furthermore, Directed Acyclic Graphs are used to determine the contemporaneous causal patterns of prices observed at different regions. We also conduct cointegration analyses to investigate the long-run relationships between corn, soybean meal, and distiller’s grain prices. Overall, results suggest that with a few exceptions, the distiller’s grain market in the US market is well-integrated for the ten locations considered. It also appears that while there appears to be no long-run relationship between corn, soybean meal, and distiller’s grain prices prior to 2007, a much stronger link between them has been established since then, in parallel with the expansion of ethanol production and the maturity of DDGS markets.