اثر فهرست اتانول بر قیمت ذرت: شواهدی از بازار لحظه ای و آینده

The use of corn for ethanol has been the topic of heated discussions in the media and among policy makers. As part of this debate, some observers have argued that the use of corn in the production of ethanol has had adverse effects on corn prices. This paper contributes to this reviving debate by examining the impact of the listing of ethanol futures in the Chicago Board of Trade on the spot and futures prices for corn. We find a significant listing effect, indicating that the listing of ethanol has had a positive contribution to both price and volatility in the corn market, especially in the spot and the shorter maturity futures contracts, and mostly through its interaction with trading volume in the corn market. We discuss the policy implications of the findings for investors and its relevance for the ongoing debate on US energy policy. We conclude with some suggestions for future research.

Ethanol began trading in the Chicago Board of Trade (CBOT) in March 2005 as a result of joint work with the CBOT and the ethanol industry. The listing of ethanol as a tradable contract has allowed investors as well as academics to track trading volume and price trends on a daily basis. Today, traders on the CBOT can take short or long positions in ethanol contracts going out several years into the future, providing them with a valuable tool to manage price volatility in the ethanol market. Although the introduction of ethanol futures contracts signifies a milestone in the developing ethanol market, the media as well as policy makers have been divided about the use of ethanol as an alternative fuel, however, resulting in a heated discussion on the benefits and advantages of using corn for ethanol.1 Ethanol can be produced from starch or sugar-based feed stocks including common crops such as corn and sugarcane. In Brazil where ethanol has been widely used in cars since 1979, sugarcane is the main ingredient used in the production of ethanol. However, in the U.S., ethanol is made from corn even though corn is a less efficient source than sugarcane and one of the main criticisms of ethanol's critics has been the adverse effect on corn prices of using corn for ethanol.2 Some observers even blame the 2008 mid-year bubble in corn prices on the use of corn to produce ethanol.3 As Fig. 1 suggests, there has been a dramatic increase in corn prices since 2005, interestingly around the time when ethanol was listed in the CBOT. In addition, trading activity in the corn market has also increased following the listing of ethanol (Fig. 2). It is interesting to note that these price and trading activity trends in the corn market also coincide with the initiation of the Energy Policy Act in mid-2005 which led to major changes in the U.S. energy policy including a mandate to increase the amount of ethanol blended into gasoline sold in the U.S as well as significant tax incentives for the production and use of biofuels. Considering these two significant developments in the market regarding the production, use and trading of ethanol, it would be appropriate to suggest that a possible listing effect will be a combination of ethanol listing on the CBOT and the major change in U.S. energy policy. Clearly, one cannot assume that the corn supply in the U.S. is constant and that greater use of corn for ethanol would mean less corn for food. However, even assuming a dynamic corn supply, one would expect the price processes in these markets to be somehow interlinked. In fact, a simple analysis of daily changes in corn and ethanol prices suggests almost a 50% correlation between the two (see Fig. 3) suggesting a strong link between the two price processes. The relatively high correlation between the returns in these markets may explain the significant increase in the trading activity in the corn market following the listing of ethanol (Fig. In this study, we examine the impact of listing of ethanol futures on corn prices and empirically test the validity of the argument that the listing of ethanol in the CBOT has impacted price and volatility in the corn market. However, it must be noted that any possible listing effect will be driven by not only the listing of ethanol futures in the CBOT but also by the initiation of the Energy Policy Act as both took place in the mid-2005. Therefore, it will be appropriate to define the listing effect examined in this study as a combination of ethanol listing in the CBOT and regulation change. Several recent studies in the literature have examined the relationship between food and fuel prices. Ajanovic (2011) reports no significant impact of biofuels production on feedstock prices as feedstock production has also continuously increased to keep up with the increasing demand for biofuels in the energy market. However, she also adds that this upward trend will eventually call sustainability issues into question. Similarly, Zhang et al. (2010) find no direct relationship between fuel and agricultural commodity prices, however, they report an indirect effect through sugar prices as sugar is the number one input for ethanol production globally. In another study, Chen et al. (2010) examines the impact of oil prices on grain prices and find that changes in grain prices are significantly influenced by changes in crude oil prices. They also note that grain commodities are competing with the derived demand for biofuels during periods of higher oil prices. Alghalith (2010) finds similar results and reports that higher oil prices as well as price volatility lead to higher food prices. Even though the literature offers mixed evidence on the interaction between food and fuel prices, no prior study has specifically focused on the impact of ethanol trading as a financial contract on corn prices. We are particularly interested in the volatility effects of the listing because an increase in corn price volatility would mean higher risk for investors as well as market participants on the supply and demand side of the corn market. It is possible that ethanol listing may have created speculative opportunities for investors in the market who take simultaneous positions in the highly liquid corn and the growing ethanol futures markets. In fact, at the peak of the price bubble in 2008, commodity fund investors, including hedge funds like Soros Fund Management run by George Soros, controlled a record 4.51 billion bushels of corn, wheat and soybeans through the futures markets of Chicago Board of Trade, equal to half the amount held in U.S. silos on March 1, 2008.4 From this perspective, one can argue that trading activity in the ethanol futures market which might partially be influenced by governmental regulations5 may have had a marginal contribution to corn price volatility through speculative activities by hedge funds. 6 On the other hand, one might also argue that ethanol listing may have provided hedgers in the market another risk management tool to manage price volatility in the corn market, possibly leading to lower volatility in the corn market. Therefore, the main contribution of our study is to empirically test the validity of these opposite arguments. A second contribution of this study is to extend the analysis to both spot and futures prices for different maturities in the corn market. As futures prices for different maturities reflect traders' expectations of future supply/demand conditions, we also explore possible listing effect on future price expectations for corn. Hence, our empirical results that capture the impact of the listing of ethanol in the corn spot and futures markets may shed some light on the recent debate regarding the introduction of ethanol as a substitute energy fuel and its impact on corn prices for different maturities. Finally, this study contributes to the literature on the listing effect. The literature on the listing effect has mainly focused on equity markets (e.g. Bollen, 1998, Danielsen and Sorescu, 2001, Jubinski and Tomljanovich, 2007 and Mazouz, 2007). In general, these studies have examined the impact of options or futures listing on the volatility of underlying assets. However, the literature offers a very limited number of studies on the listing effect in commodity markets. To the best of our knowledge, there have not been any studies on the corn market. Weaver and Banerjee (1990) examine the effect of futures trading of cattle on cash prices in the live beef cattle market and conclude that futures trading did not lead to instability in cattle prices. Antoniou and Foster (1992) employ the GARCH methodology to test the effect of futures trading on spot price volatility in the Brent crude oil market and report a significant change in volatility following the introduction of the derivatives market. In another application to energy markets, Fleming and Ostdiek (1999) examine the introduction of energy derivatives on the crude oil market and report a short-term abnormal increase in oil price volatility following the introduction of NYMEX crude oil futures. However, they note that this increase in volatility cannot be solely attributed to derivatives trading as deregulation of the U.S. derivatives industry was a significant factor driving volatility in the energy market. This is also the case in our study as the futures listing of ethanol and a major energy policy change both happen in mid-2005 which makes it impossible to separate the effect of one from the other; therefore we define the listing effect in this study as the combined effect of ethanol listing and the change in energy policy, even though we will name it as the listing effect. Most of the other studies in the literature, however, have focused on the impact of options listing on the volatility of the underlying equity market and provide mixed evidence on the listing effect. Given the mixed evidence on the impact of the listing on equity markets and scant studies on commodity markets with no further conclusive evidence, providing fresh evidence from a different commodity market with significant energy policy implications is important to further shed light on this debate. Looking forward, our results indicate a significant effect of ethanol listing on the corn market. We find a significant positive contribution of ethanol listing on both the price and volatility in the corn market, more significantly in the spot market. The contribution of ethanol listing on the daily standard deviation is statistically significant, ranging between a high of 2.4% for spot prices and a low of 1.3% for the longest maturity futures contract. The estimated contributions are also significant in economic terms: A 2.4% contribution to standard deviation amounts to almost 40% contribution to volatility on an annual basis, suggesting significant hedging costs for participants in the corn market. The findings are robust after controlling for trading volume in the corn market suggesting that the results are not a statistical artifact. In the next section, we describe our methodology. In Section 3, we present the data used and the empirical results. The last section concludes the paper.