Abstract
In this paper, we seek to identify the price and volatility transmission mechanisms between DDGS, corn, and soybean meal markets to better inform market participants who wish to manage price risks in these three markets. Using weekly data from January 2000 to May 2016, we find important interplays between the three markets in both price and volatility dynamics. We uncover a stable long-run equilibrium between the three prices, and find that in the long-run, DDGS prices are positively correlated with both corn and soybean meal prices. However, corn and soybean meals are weakly exogenous — neither markets respond to deviations from this long-run relationship. We also find strong time-varying dynamic conditional correlations between the three markets, with the correlation between DDGS and corn strengthening between 2006 and 2012, the period when ethanol production in the US underwent massive expansion. Additionally, we identify significant volatility spillovers from both the corn and soybean meal markets to the DDGS market, with the impact from corn shocks much larger compared to soybean meal shocks. Corn appears to be the primary channel through which exogenous shocks are transmitted to the DDGS market. Our results also suggest that neither DDGS prices nor volatility significantly impact the corn and soybean meal markets.
Highlights
IntroductionDDGS are a co-product from dry-mill ethanol productions, high in both energy and protein content
Background and Related LiteratureDDGS are a co-product from dry-mill ethanol productions, high in both energy and protein content
We seek to fill in this literature gap by identifying the price and volatility transmission mechanisms between DDGS, corn, and soybean meal markets
Summary
DDGS are a co-product from dry-mill ethanol productions, high in both energy and protein content. DDGS were used in livestock feeds as a source of protein, often replacing soybean meal in the feed ration. Tightening corn supplies and the increasingly volatile corn prices had led many livestock producers to replace corn in the feed ration with DDGS as an energy source. In a survey conducted by Stroade et al (2010), 87 percent of the ethanol plants used corn futures prices to establish the benchmark prices of distiller’s grains, while 43 percent of the respondents used soybean meal futures prices as a benchmark
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