How Market Efficiency and the Theory of Storage Link Corn and Ethanol Markets Energy Economics

Mindy Mallory (), Scott Irwin and Dermot Hayes

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: This article uses the theories of market efficiency and supply of storage to develop a conceptual link between the corn and ethanol markets and explores statistical evidence for the link. We propose that a long-run no-profit condition is established in distant futures markets for ethanol, corn and natural gas and then use the theory of storage to define an inter-temporal equilibrium among these prices. The relationship shows that under certain conditions, future price expectations will influence nearby futures prices and that a short-term relationship between input and output prices will exist. We demonstrate validity of the theory using a structural price model and then by means of time-series techniques.

Date: 2012-11-01
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