Effects of the US Ethanol Mandates on Corn, Ethanol and Oil Prices

Effects of the US Ethanol Mandates on Corn, Ethanol and Oil Prices

This paper examines the effects of ethanol mandates on corn, ethanol and oil prices through time series modeling. The empirical results suggest that corn price movements were independent of oil price before the August 8, 2005 imposition of the first ethanol mandate (Period I). This study also concludes that the effects of the first ethanol mandate were not significant from August 8, 2005 to December 18, 2007. However, a long-run relationship among oil, corn and ethanol prices was found after the imposition of the second ethanol mandate on December 19, 2007 (Period III), although shortrun relationships were found in periods I and II. Ethanol mandates exerted a significant influence in Period III since a large proportion of ethanol price fluctuations were explained by corn and oil prices. In addition, dynamics among oil, corn and ethanol prices exhibited strong long-run relationships between oil and ethanol prices and between corn and ethanol prices, but there was no close relationship between corn and oil prices. Therefore, the mandates’ effect was more pronounced after the second (December 2007). Furthermore, it is expected that ethanol mandates will be a major threat to food security in the future without substantial technological innovation.