An Enhanced Exposition of the Corn-Ethanol-Energy Price Linkages and Implications for Time Series Analysis of Biofuel Policy Impacts

The purpose of this chapter is to critically assess a burgeoning literature that uses high-frequency time series (HFT) econometric analysis (using daily, weekly or monthly data) that frantically seeks a link between feedstock and biofuel prices (say corn and ethanol), biofuel and gasoline/diesel prices, or directly between feedstock (e.g., corn) and crude oil prices. All of these papers explicitly or implicitly state that their objective is to determine the impact of biofuel policies on food commodity prices, and that their results have policy implications. To them, the impact of biofuel policies simply depends on the size and significance of the positive relationship between these prices: feedstock, biofuel, energy, or crude oil prices. Granger causality tests are also undertaken (studies even find corn prices “cause” crude oil prices!) If no link is found or the evidence is mixed then biofuel policies’ impact on crop prices is just that: none or unclear, respectively. All papers in this HFT econometric literature come to one of these three conclusions on biofuel policies’ impact on commodity markets: yes, no, or maybe.