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How does petroleum price and corn yield volatility affect ethanol markets with and without an ethanol use mandate?

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  • Thompson, Wyatt
  • Meyer, Seth
  • Westhoff, Pat
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    Abstract

    The recent increase in ethanol use in the US strengthens and changes the nature of links between agricultural and energy markets. Here, we explore the interaction of market volatility and the scope for policy to affect this interaction, with a focus on how corn yields and petroleum prices affect ethanol prices. Mandates associated with new US energy legislation may intervene in these links in the medium-term future. We simulate stochastically a structural model that represents these markets, and that includes mandates, in order to assess how shocks to corn or oil markets can affect ethanol price and use. We estimate that the mandate makes ethanol producer prices more sensitive to corn yields and less sensitive to changes in petroleum prices overall. We note a discontinuity in these links that is caused by the mandate. Ethanol use can exceed the mandate if petroleum prices and corn yields are high enough, but the mandate limits downside adjustments in ethanol use to low petroleum prices or corn yields.

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    Bibliographic Info

    Article provided by Elsevier in its journal Energy Policy.

    Volume (Year): 37 (2009)
    Issue (Month): 2 (February)
    Pages: 745-749

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    Handle: RePEc:eee:enepol:v:37:y:2009:i:2:p:745-749

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    Web page: http://www.elsevier.com/locate/enpol

    Related research

    Keywords: Ethanol Mandate Price variability;

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    Cited by:
    1. Algieri, Bernardina, 2013. "A Roller Coaster Ride: an empirical investigation of the main drivers of wheat price," Discussion Papers 145556, University of Bonn, Center for Development Research (ZEF).
    2. Wang, Xiaolei & Ouyang, Yanfeng & Yang, Hai & Bai, Yun, 2013. "Optimal biofuel supply chain design under consumption mandates with renewable identification numbers," Transportation Research Part B: Methodological, Elsevier, vol. 57(C), pages 158-171.
    3. Ikram Jebabli & Mohamed Arouri & Frédéric Teulon, 2014. "On the effects of world stock market and oil price shocks on food prices: An empirical investigation based on TVPVAR models with stochastic volatility," Working Papers 2014-209, Department of Research, Ipag Business School.
    4. Ladislav Kristoufek & Karel Janda & David Zilberman, 2012. "Mutual Responsiveness of Biofuels, Fuels and Food Prices," CAMA Working Papers 2012-38, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    5. Ladislav Kristoufek & Karel Janda & David Zilberman, 2013. "Non-linear price transmission between biofuels, fuels and food commodities," Working Papers IES 2013/16, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Oct 2013.
    6. Xiaodong Du & Dermot J. Hayes, 2008. "Impact of Ethanol Production on U.S. and Regional Gasoline Prices and on the Profitability of the U.S. Oil Refinery Industry, The," Center for Agricultural and Rural Development (CARD) Publications 08-wp467, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    7. Peter Maniloff, 2013. "Ethanol and Energy Security," Working Papers 2013-10, Colorado School of Mines, Division of Economics and Business.
    8. Condon, Nicole & Klemick, Heather & Wolverton, Ann, 2013. "Impacts of Ethanol Policy on Corn Prices: A Review and Meta-Analysis of Recent Evidence," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 149940, Agricultural and Applied Economics Association.
    9. Thompson, Wyatt & Meyer, Seth D. & Westhoff, Patrick C., 2010. "Us Biofuel And Climate Policies Duel Over Cellulosic Biomass," Proceedings Issues, 2010: Climate Change in World Agriculture: Mitigation, Adaptation, Trade and Food Security, June 2010, Stuttgart- Hohenheim, Germany 91404, International Agricultural Trade Research Consortium.
    10. Du, Xiaodong & Hayes, Dermot J., 2010. "The Impact of Ethanol Production on U.S. And Regional Gasoline Markets," Staff General Research Papers 31483, Iowa State University, Department of Economics.
    11. Whistance, Jarrett & Thompson, Wyatt, 2010. "How does increased corn-ethanol production affect US natural gas prices?," Energy Policy, Elsevier, vol. 38(5), pages 2315-2325, May.
    12. Mindy L. Mallory & Dermot J. Hayes & Scott H. Irwin, 2010. "How Market Efficiency and the Theory of Storage Link Corn and Ethanol Markets," Center for Agricultural and Rural Development (CARD) Publications 10-wp517, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    13. Walls, W.D. & Rusco, Frank & Kendix, Michael, 2011. "Biofuels policy and the US market for motor fuels: Empirical analysis of ethanol splashing," Energy Policy, Elsevier, vol. 39(7), pages 3999-4006, July.
    14. Trujillo-Barrera, Andres & Mallory, Mindy L. & Garcia, Philip, 2012. "Volatility Spillovers in U.S. Crude Oil, Ethanol, and Corn Futures Markets," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 37(2), August.
    15. Swinbank, Alan & Tranter, Richard & Jones, Philip, 2011. "Mandates, buyouts and fuel-tax rebates: Some economic aspects of biofuel policies using the UK as an example," Energy Policy, Elsevier, vol. 39(3), pages 1249-1253, March.
    16. Shaun K. Roache, 2010. "What Explains the Rise in Food Price Volatility?," IMF Working Papers 10/129, International Monetary Fund.

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