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How Market Efficiency and the Theory of Storage Link Corn and Ethanol Markets

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In this article we use the theories of market efficiency and supply of storage to develop a conceptual link between the corn and ethanol markets and explore statistical evidence for the link. We propose that a long-run no-profit condition is established in distant futures markets for ethanol, corn, and natural gas and then use the theory of storage to define an inter-temporal equilibrium among these prices. The relationship shows that under certain conditions, future price expectations will influence current spot prices and that a short-term relationship between input and output prices will exist. This short-term relationship will contain fixed costs. We demonstrate validity of the theory using a structural price model and then by means of time-series techniques.

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Paper provided by Food and Agricultural Policy Research Institute (FAPRI) at Iowa State University in its series Food and Agricultural Policy Research Institute (FAPRI) Publications with number 10-wp517.

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Date of creation: Dec 2010
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Handle: RePEc:ias:fpaper:10-wp517

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Keywords: arbitrage; cointegration; corn; energy; ethanol; futures; price-analysis; storage.;

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Citations

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Cited by:
  1. Etienne, Xiaoli L. & Irwin, Scott H. & Garcia, Philip, 2013. "Dissecting Corn Price Movements with Directed Acyclic Graphs," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C., Agricultural and Applied Economics Association 151279, Agricultural and Applied Economics Association.
  2. Baumeister, Christiane & Kilian, Lutz, 2013. "Do Oil Price Increases Cause Higher Food Prices?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9689, C.E.P.R. Discussion Papers.
  3. 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, Western Agricultural Economics Association, vol. 37(2), August.
  4. Serra, Teresa & Zilberman, David, 2013. "Biofuel-related price transmission literature: A review," Energy Economics, Elsevier, Elsevier, vol. 37(C), pages 141-151.
  5. Rajcaniova, Miroslava & Drabik, Dusan & Ciaian, Pavel, 2013. "How policies affect international biofuel price linkages," Energy Policy, Elsevier, vol. 59(C), pages 857-865.
  6. Drabik, Dusan, 2011. "The Theory of Biofuel Policy and Food Grain Prices," Working Papers, Cornell University, Department of Applied Economics and Management 126615, Cornell University, Department of Applied Economics and Management.

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