Price Impacts of Ethanol Production in Ontario

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Date

2015-05-13

Authors

Wu, Zhige

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Publisher

University of Guelph

Abstract

The purpose of this dissertation is to examine the effects on the prices for local feed grains and related food retail goods in Ontario stemming from the increase in corn-based ethanol production within the province. The issue is examined within the context of three separate but related papers. The first paper aims to assess the factors influencing the basis for corn and soybeans in Ontario. Using prices for 7 elevators and production levels for 7 ethanol plants, this paper captures both short and long-run impacts of nearby ethanol capacities on the crop basis using a vector error correction model and a spatial error regression model. The results indicate the corn basis increased on average by 5 cents per bushel in the long-run for elevators located in counties with a relatively small livestock sector. In contrast, the soybean basis responded negatively to ethanol production in particular for elevators located in counties with relatively small soybean planted area. Similar results were obtained with the consideration of spatial autocorrelation. The second paper tests for the existence of an asymmetric price transmission relationship between corn and soybeans spot price and futures prices. The paper hypothesized that local crop prices do not rise as quickly as futures prices in times of increasing prices but the two price series fall at the same rate. Using weekly price data, multiple asymmetric price transmission methods are applied to evaluate the asymmetric linkage. It is found that corn spot-futures price series exhibited a positive asymmetric price transmission relationship as hypothesized, whereas soybeans showed a negative asymmetric price transmission response. The third paper examines the dynamic linkage between energy, feed grain, livestock, and related human food prices in Ontario. A structural break test indicated a structural change in energy prices occurred in May 2005. Cointegration tests failed to find a cointegrated relationship between fuel, feed, and food prices in the pre-ethanol period starting in 1997. However, a long-run cointegrating relationship between oil, ethanol, food, livestock and subsequent meat prices was found to exist in the ethanol-boom period after May 2005.

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Keywords

Ethanol, Price Transmission, Grain Basis

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