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

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Abstract

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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File URL: http://www.card.iastate.edu/publications/DBS/PDFFiles/10wp517.pdf
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File URL: http://www.card.iastate.edu/publications/synopsis.aspx?id=1150
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Bibliographic Info

Paper provided by Midwest Agribusiness Trade Research and Information Center (MATRIC) at Iowa State University in its series Midwest Agribusiness Trade Research and Information Center (MATRIC) Publications with number 10-wp517.

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

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Related research

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

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  1. Harry de Gorter & David R. Just, 2007. "The Welfare Economics of a Biofuel Tax Credit and the Interaction Effects with Price Contingent Farm Subsidies," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(2), pages 477-488.
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Cited by:
  1. 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.
  2. Drabik, Dusan, 2011. "The Theory of Biofuel Policy and Food Grain Prices," Working Papers 126615, Cornell University, Department of Applied Economics and Management.

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