Jumping beans: Implications of fat tails in international soybean and biofuels markets

Several recent policies have been promulgated to reduce reliance on fossil fuels in the United States (US) transportation sector. To achieve these ambitious goals, it seems highly likely that refineries will have to accommodate significant inflows of soybeans imported from Brazil; important large-scale (irreversible) investments will also be required. These investments are subject to substantial uncertainty, underscoring the importance of characterizing the stochastic nature of soybean prices. In this paper we investigate the potential presence of jumps in four key prices: the spot price for soybeans and ethanol, in both Brazil the US. We find compelling empirical evidence for the importance of jumps in both markets. The presence of jumps in these markets has important implications for large scale infrastructure investments, as would be necessary to produce ethanol-based motor vehicle fuels, as well as ecological implications associated with deforestation that is likely to accompany any increases in Brazilian soybean production.