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

Abstract

This paper examines the effects of ethanol mandates on corn, ethanol andoil prices through time series modeling. The empirical results suggest thatcorn price movements were independent of oil price before the August 8,2005 imposition of the first ethanol mandate (Period I). This study alsoconcludes that the effects of the first ethanol mandate were not significantfrom August 8, 2005 to December 18, 2007. However, a long-run relationshipamong oil, corn and ethanol prices was found after the imposition of thesecond ethanol mandate on December 19, 2007 (Period III), althoughshort-run relationships were found in periods I and II. Ethanol mandatesexerted a significant influence in Period III since a large proportion of ethanolprice fluctuations were explained by corn and oil prices. In addition, dynamicsamong oil, corn and ethanol prices exhibited strong long-run relationshipsbetween oil and ethanol prices and between corn and oil prices. Therefore,the mandates' effect was more pronounced after the second (December2007). Furthermore, it is expected that ethanol mandates will be a majorthreat to food security in the future without substantial technologicalinnovation.