Publication Date

12-2010

Series Number

10-WP 517

Abstract

In this article we use the theories of market efficiency and supply of storage to develop a conceptual link between the corn and ethanol markets and explore 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 current spot prices and that a short-term relationship between input and output prices will exist. This short-term relationship will contain fixed costs. We demonstrate validity of the theory using a structural price model and then by means of time-series techniques.

Publication Information

This working paper was published as Mallory, Mindy L., Scott H. Irwin and Dermot J. Hayes, "How market efficiency and the theory of storage link corn and ethanol markets," Energy Economics 34 (2012): 2157–2166, doi:10.1016/j.eneco.2012.03.011.

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