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

55 Pages Posted: 6 Sep 2017

See all articles by Christiane Baumeister

Christiane Baumeister

University of Notre Dame; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Reinhard Ellwanger

Government of Canada - Bank of Canada

Lutz Kilian

University of Michigan at Ann Arbor - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 4 versions of this paper

Date Written: August 2017

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.

Suggested Citation

Baumeister, Christiane and Ellwanger, Reinhard and Kilian, Lutz, Did the Renewable Fuel Standard Shift Market Expectations of the Price of Ethanol? (August 2017). NBER Working Paper No. w23752. Available at SSRN: https://ssrn.com/abstract=3031723

Christiane Baumeister (Contact Author)

University of Notre Dame ( email )

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National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Reinhard Ellwanger

Government of Canada - Bank of Canada ( email )

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Canada

Lutz Kilian

University of Michigan at Ann Arbor - Department of Economics ( email )

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Ann Arbor, MI 48109-1220
United States
734-764-2320 (Phone)
734-764-2769 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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