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Time-Varying Price Interactions and Risk Management in Livestock Feed Markets – Determining the Ethanol Surge Effect

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  • Tejeda, Hernan A.

Abstract

This paper studies the dynamic effects that the recent growth in supply of Distiller Dried Grains (DDGs), due to the ethanol production surge from corn consumption, has had in relation to other market feeds, specifically corn, grain sorghum and soybean meal. Prior to the U.S. ethanol surge, more than a half of corn’s production was consumed as feed for livestock. This amount has dropped to around 40%, as corn is increasingly being used – about 1/3 of U.S. supply - for ethanol production. Ethanol’s by-product for feed, DDGs, contains more proteins than corn and serves as substitute in feed rations for livestock, and may likewise affect soybean meal, a protein feed component. In addition, increased corn demand may impact grain sorghum (milo), a similar carbohydrate substitute. A multivariate regime-switching model is applied to two different periods, pre and post- ethanol mandates (Energy Acts of 2005 and 2007), to gauge the dynamic correlations among these markets. Results are consistent with previous literature regarding increasing relationship (correlation) between DDGs and corn, among others. More importantly, an improved characterization of the dynamic inter-relationships between these feed markets not only empirically identifies ethanol surge effects, but serves to assess cross-hedging potential with current corn and soybean meal futures markets. Implications for agricultural price levels, risk management and policy analysis are discussed.

Suggested Citation

  • Tejeda, Hernan A., 2012. "Time-Varying Price Interactions and Risk Management in Livestock Feed Markets – Determining the Ethanol Surge Effect," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124956, Agricultural and Applied Economics Association.
    • Handle: RePEc:ags:aaea12:124956
    DOI: 10.22004/ag.econ.124956
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    References listed on IDEAS

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    Cited by:

    1. da Silveira, Rodrigo Lanna F. & Mattos, Fabio L., 2015. "Price And Volatility Transmission In Livestock And Grain Markets: Examining The Effect Of Increasing Ethanol Production Across Countries," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 205684, Agricultural and Applied Economics Association.
    2. Hao, Na & Colson, Gregory & Seong, Byeongchan & Park, Cheolwoo & Wetzstein, Michael, 2015. "Drought, ethanol, and livestock," Energy Economics, Elsevier, vol. 49(C), pages 301-307.
    3. Chiu, Fan-Ping & Hsu, Chia-Sheng & Ho, Alan & Chen, Chi-Chung, 2016. "Modeling the price relationships between crude oil, energy crops and biofuels," Energy, Elsevier, vol. 109(C), pages 845-857.

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