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Ethanol, Corn, and Soybean Price Relations in a Volatile Vehicle-Fuels Market

Author

Listed:
  • Zibin Zhang

    (Economics, Zhejiang University, Hangzhou 310027, China)

  • Luanne Lohr

    (Agricultural and Applied Economics, University of Georgia, Athens, GA 30602, USA)

  • Cesar Escalante

    (Agricultural and Applied Economics, University of Georgia, Athens, GA 30602, USA)

  • Michael Wetzstein

    (Agricultural and Applied Economics, University of Georgia, Athens, GA 30602, USA)

Abstract

The rapid upward shift in ethanol demand has raised concerns about ethanol’s impact on the price level and volatility of agricultural commodities. The popular press attributes much of this volatility in commodity prices to a price bubble in ethanol fuel and recent deflation. Market economics predicts not only a softening of demand to high commodity prices but also a positive supply response. This volatility in ethanol and commodity prices are investigated using cointegration, vector error corrections (VECM), and multivariate generalized autoregressive conditional heteroskedascity (MGARCH) models. In terms of derived demand theory, results support ethanol and oil demands as derived demands from vehicle-fuel production. Gasoline prices directly influence the prices of ethanol and oil. However, of greater significance for the fuel versus food security issue, results support the effect of agricultural commodity prices as market signals which restore commodity markets to their equilibriums after a demand or supply event (shock). Such shocks may in the short-run increase agricultural commodity prices, but decentralized freely operating markets will mitigate the persistence of these shocks. Results indicate in recent years there are no long-run relations among fuel (ethanol, oil and gasoline) prices and agricultural commodity (corn and soybean) prices.

Suggested Citation

  • Zibin Zhang & Luanne Lohr & Cesar Escalante & Michael Wetzstein, 2009. "Ethanol, Corn, and Soybean Price Relations in a Volatile Vehicle-Fuels Market," Energies, MDPI, vol. 2(2), pages 1-20, June.
    • Handle: RePEc:gam:jeners:v:2:y:2009:i:2:p:320-339:d:5107
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    References listed on IDEAS

    as
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