The Impact of Ethanol Production on Local Corn Basis

The focus of this study is on the impact local ethanol plants have on corn basis. Basis is the difference between the local cash price and the nearby futures contract price, and accounts for variation in the supply and demand in the local market relative to the national market. It is predicted that the entrance of an ethanol plant into a local cash market will increase corn demand, resulting in an increased cash price relative to futures. br br The data employed consists of cash corn prices from 153 grain buyers in eight different Midwestern states from Fall 1999 through Summer 2009. In addition to affects from local ethanol production, it is predicted that basis is influenced to by the ratio of local to national corn production, transportation costs, storage opportunity costs, and seasonal factors. To estimate corn basis performance a spatial error component model is adopted that accounts for both spatial dependencies and panel structures in the data. br br Results show that ethanol production within a 50-mile region of a county centroid has a small yet positive impact on local corn prices. The estimated impact of a 50 million gallon per year plant is a 0.425 cent per bushel increase in basis. These findings are smaller than the impacts found in previous work using a more limited time frame, but found to be consistent with earlier work when the time series is truncated to match sample periods from previous work. This suggests that some of the local price impacts dissipate with time.