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Price Volatility, Nonlinearity, and Asymmetric Adjustments in Corn, Soybean, and Cattle Markets: Implications of Ethanol-Driven (Market) Shocks

Listed author(s):
  • Tejeda, Hernan A.
  • Goodwin, Barry K.

Grain prices have risen sharply since 2005 and 2006 affecting livestock markets by increasing feed prices and leading to significant volatility shocks. The high price levels and magnitude of sustained high volatilities has raised concerns for many sectors of the economy, in particular those with direct relation to these markets. Policy makers are analyzing the interrelationships among these markets, and the effects of energy market shocks on agricultural markets. This study considers a threshold structure in a multivariate time-series model that evaluates these market linkages, capturing asymmetric correlations between grain and livestock prices, including volatility spillovers. We empirically study the impact of corn usage for ethanol production in the evolution of the above mentioned prices. Results are compared to previous scenarios where corn, soybean and livestock production and consumption did not face the corn demand for ethanol production. We find positive dynamic correlations between corn and soybean and feeder and fed cattle prices, consistent with the literature. And we find an inverse or negative relation between corn and feeder/calf prices for the period post mandated ethanol production, as anticipated by the literature for increased corn prices. Also, we find there are adjustment costs inhibiting price transmission between the crops and the live cattle market, in the form of modifying feeding rations. More relevantly, we identify plausible asymmetric effect on the correlations between the markets, especially when considering the period for the ethanol driven corn consumption versus previous periods of corn consumption. These asymmetric correlations are the result of spillover effects.

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File URL: http://purl.umn.edu/53039
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Paper provided by NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management in its series 2009 Conference, April 20-21, 2009, St. Louis, Missouri with number 53039.

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Date of creation: Apr 2009
Handle: RePEc:ags:nccc09:53039
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  1. Lawrence, John & Wang, Zhi & Loy, Dan, 1999. "Elements of Cattle Feeding Profitability in Midwest Feedlots," ISU General Staff Papers 199901010800001486, Iowa State University, Department of Economics.
  2. Lawrence, John D. & Wang, Zhi & Loy, Dan, 1999. "Elements of Cattle Feeding Profitability in Midwest Feedlots," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 31(02), pages 349-357, August.
  3. Barry K. Goodwin & Nicholas E. Piggott, 2001. "Spatial Market Integration in the Presence of Threshold Effects," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(2), pages 302-317.
  4. Tejeda, Hernan A. & Goodwin, Barry K. & Pelletier, Denis, 2009. "A State Dependent Regime Switching Model of Dynamic Correlations," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49370, Agricultural and Applied Economics Association.
  5. Anderson, John D. & Trapp, James N., 2000. "The Dynamics of Feeder Cattle Market Responses to Corn Price Change," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 32(03), pages 493-505, December.
  6. Lawrence, John & Mintert, James & Anderson, John D. & Anderson, David P., 2008. "Feed Grains and Livestock: Impacts on Meat Supplies and Prices," ISU General Staff Papers 200801010800001479, Iowa State University, Department of Economics.
  7. Trostle, Ronald, 2008. "Factors Contributing to Recent Increases in Food Commodity Prices (PowerPoint)," Seminars 43902, USDA Economists Group.
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