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The effect of ethanol policies on the vertical price transmission in corn and food markets

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  • Drabik, Dušan
  • Ciaian, Pavel
  • Pokrivčák, Ján

Abstract

This paper analyzes the impact of ethanol policies on price transmission along the food supply chain. We consider the US corn sector and its vertical links with food and ethanol (energy) markets. We find that ethanol is a source of imperfect price transmission in the food supply chain. Ethanol, however, alters price transmission only under a binding blender's tax credit and only from food to corn (not vice versa). Our results indicate that ethanol weakens the response of corn and food prices in terms of their level changes to shocks occurring in agricultural (corn and food) markets. The results are robust to different assumptions on the model parameters. Although market power has previously been identified as a source of imperfect price transmission in the food supply chain, our findings show that in the presence of ethanol, the imperfect price transmission may occur even if markets are perfectly competitive. This warrants careful evaluation of markets before any policy intervention.

Suggested Citation

  • Drabik, Dušan & Ciaian, Pavel & Pokrivčák, Ján, 2016. "The effect of ethanol policies on the vertical price transmission in corn and food markets," Energy Economics, Elsevier, vol. 55(C), pages 189-199.
    • Handle: RePEc:eee:eneeco:v:55:y:2016:i:c:p:189-199
    DOI: 10.1016/j.eneco.2016.02.010
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    More about this item

    Keywords

    Price transmission; Food supply chain; Biofuels; Policies; Mandate; Tax credit; Prices;
    All these keywords.

    JEL classification:

    • Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices
    • Q21 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Demand and Supply; Prices

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