Time-Varying Price Interactions and Risk Management in Livestock Feed Markets – Determining the Ethanol Surge Effect.

This paper studies the dynamic effects that the recent growth in supply of Distiller Dried Grains (DDGs), due to the ethanol production surge from corn consumption, has had in relation to other market feeds, specifically corn, grain sorghum and soybean meal. Prior to the U.S. ethanol surge, more than a half of corn’s production was consumed as feed for livestock. This amount has dropped to around 40%, as corn is increasingly being used – about 1/3 of U.S. supply - for ethanol production. Ethanol’s by-product for feed, DDGs, contains more proteins than corn and serves as substitute in feed rations for livestock, and may likewise affect soybean meal, a protein feed component. In addition, increased corn demand may impact grain sorghum (milo), a similar carbohydrate substitute. A multivariate regime-switching model is applied to two different periods, pre and post- ethanol mandates (Energy Acts of 2005 and 2007), to gauge the dynamic correlations among these markets. Results are consistent with previous literature regarding increasing relationship (correlation) between DDGs and corn, among others. More importantly, an improved characterization of the dynamic inter-relationships between these feed markets not only empirically identifies ethanol surge effects, but serves to assess cross-hedging potential with current corn and soybean meal futures markets. Implications for agricultural price levels, risk management and policy analysis are discussed.


Issue Date:
2012
Publication Type:
Conference Paper/ Presentation
PURL Identifier:
http://purl.umn.edu/124956
Total Pages:
18




 Record created 2017-04-01, last modified 2017-08-26

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