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How market efficiency and the theory of storage link corn and ethanol markets

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  • Mallory, Mindy L.
  • Irwin, Scott H.
  • Hayes, Dermot J.

Abstract

This article uses the theories of market efficiency and supply of storage to develop a conceptual link between the corn and ethanol markets and explores 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 nearby futures prices and that a short-term relationship between input and output prices will exist. We demonstrate validity of the theory using a structural price model and then by means of time-series techniques.

Suggested Citation

  • Mallory, Mindy L. & Irwin, Scott H. & Hayes, Dermot J., 2012. "How market efficiency and the theory of storage link corn and ethanol markets," Energy Economics, Elsevier, vol. 34(6), pages 2157-2166.
    • Handle: RePEc:eee:eneeco:v:34:y:2012:i:6:p:2157-2166
    DOI: 10.1016/j.eneco.2012.03.011
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