Cornhusker Economics: Price Volatility Transmission between U.S. Biofuel, Corn, and Oil Markets

Cornhusker Economics: Price Volatility Transmission between U.S. Biofuel, Corn, and Oil Markets March 7, 2018

Many factors have been suggested as sources of increased volatility (unexpected changes) in agricultural commodity prices in recent years. One of the most-stated causes is the increase in corn-based ethanol production and the new food and ethanol linkages (Serra, 2013; Balcombe, 2011; Wright, 2011; Irwin and Good, 2009). The increased links between energy and agricultural markets raise concerns about whether new corn–ethanol links lead to volatility-spillover effects between prices of energy and agricultural commodities. Increased food-price volatility and its detrimental effects have profound economic implications, raising concerns among consumers, producers, and policymakers. High price volatility heightens food security concerns for the poor and income stability issues for farmers. It adversely affects poor consumers’ incomes and purchasing power, pushing them further into poverty, undernourishment, and hunger. It makes it difficult for farmers to make production plans and investment decisions. The quick and unexpected changes in food prices can interrupt markets, affecting social stability and government policy. Hence, the massive increase in U.S. ethanol production raises the need for a deeper understanding of its effects on price volatility in food crops from which ethanol is produced. de Gorter, Drabik, and Just (2015) argue that studying these effects is important in order to understand changes in the prices of food, such as corn.​

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