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Did the Renewable Fuel Standard Shift Market Expectations of the Price of Ethanol?

Author: Christiane J S Baumeister; Reinhard Ellwanger; Lutz Kilian; National Bureau of Economic Research.
Publisher: Cambridge, Mass. National Bureau of Economic Research 2017.
Series: Working paper series (National Bureau of Economic Research), no. w23752.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
It is commonly believed that the response of the price of corn ethanol (and hence of the price of corn) to shifts in biofuel policies operates in part through market expectations and shifts in storage demand, yet to date it has proved difficult to measure these expectations and to empirically evaluate this view. We quantify the extent to which price changes were anticipated by the market, the extent to which they  Read more...
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Details

Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Christiane J S Baumeister; Reinhard Ellwanger; Lutz Kilian; National Bureau of Economic Research.
OCLC Number: 1008870877
Notes: August 2017.
Description: 1 online resource
Series Title: Working paper series (National Bureau of Economic Research), no. w23752.
Responsibility: Christiane J.S. Baumeister, Reinhard Ellwanger, Lutz Kilian.

Abstract:

It is commonly believed that the response of the price of corn ethanol (and hence of the price of corn) to shifts in biofuel policies operates in part through market expectations and shifts in storage demand, yet to date it has proved difficult to measure these expectations and to empirically evaluate this view. We quantify the extent to which price changes were anticipated by the market, the extent to which they were unanticipated, and how the risk premium in these markets has evolved. We show that the Renewable Fuel Standard (RFS) increased ethanol price expectations by as much $1.50 initially, raising ethanol storage demand starting and causing an increase in the price of ethanol. There is no conclusive evidence that the tightening of the RFS in 2008 shifted market expectations, but our analysis suggests that policy uncertainty about how to deal with the blend wall raised the risk premium in the ethanol futures market in mid-2013 by as much as 50 cents at longer horizons. Finally, we present evidence against a tight link from ethanol price expectations to corn price expectations and hence to the storage demand for corn in 2005-06.

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