Ethanol and field crops: Is there a price connection?

- Relationship between the prices of ethanol, corn, soybeans, wheat and cattle.
- U.S. Nebraska monthly data January 1987 through March 2012.
- Boom of U.S. ethanol production policy-driven: 2005 Energy Policy Act establishing the Renewable Fuel Standard.
- Focus on long-run price relations, short-run Granger causality, in-sample and out-of-sample predictability linkages between returns on ethanol, field crops and cattle.
- Since the ethanol market has been subject to many policy interventions, structural breaks and parameter instabilities taken into account using latest statistical techniques.
- No evidence that ethanol returns Granger cause food price variations.
- Conversely, both in-sample and out-of-sample results suggest that ethanol is Granger caused and can be predicted by returns on corn. No linkages between ethanol and cattle are found.
- Out-of-sample evaluation relevant for forecasting ability and for policy making.
- Evidence provides indirect support against the main claim of the “Food vs Fuel” debate.

We analyze the relationship between the prices of ethanol, corn, soybeans, wheat and cattle in Nebraska, U.S. We focus on long-run price relations, short-run Granger causality, in-sample and out-of-sample predictability linkages between returns on ethanol, field crops and cattle. Since the ethanol market has been subject to many policy interventions, our analysis takes structural breaks and parameter instabilities into account using modern statistical techniques. We find no evidence that ethanol returns Granger cause food price variations. Conversely, both in-sample and out-of-sample results suggest that ethanol is Granger caused and can be predicted by returns on corn. No linkages between ethanol and cattle are found.