Economists: Gas price has tightest correlation to ethanol price

By Susanne Retka Schill | December 07, 2016

When it comes to price relationships, a recent analysis found statistically significant relationships between ethanol, corn and gasoline prices and ethanol ending stocks. "Gasoline price matters most, followed by corn price and ethanol ending stocks," concluded the economists reporting for the Iowa State University's AgMarketing Resource Center.

Sampath Jayasinghe and Jing Tang, Decision Innovation Solutions, published their analysis, "How Do Ethanol Ending Stocks Affect Ethanol Price?" in the December AgMRC Renewable Energy Report. 

Using four years of data from the U.S. Energy Information Administration, the economists charted weekly ethanol plant product reports against the ending stocks. As production reached historic highs, weekly ending stocks were trending down, to a 12-month low. "This is mainly due to gains in both domestic usage and exports," the authors note.

The USDA's bioenergy statistics reporting monthly average whole (rack) ethanol prices were used to analyze price relationships. As expected, wholesale ethanol prices typically move up when ending stocks move down, although the authors note the exceptions, one being the severe winter of 2014 that hampered rail movements at the same time the industry was seeing increased competition for cars from crude oil transportation. Another unresponsive period occurred during the summer of 2015, mainly due to the sharp decline in crude oil and gasoline prices.

The economists outline the statistical analysis used to evaluate the correlations between ethanol and corn price, gasoline price and ethanol ending stocks, finding in the period studied, gasoline price mattered most. "The estimated parameter for gasoline price indicates that $1 increase in gasoline price will increase ethanol price by $0.32. The estimated parameter for corn price indicates that a $1 increase in corn price will increase ethanol price by $0.14...ethanol ending stocks show a 1 million gallon increase in ethanol ending stocks will decrease ethanol price by $0.0016."

The authors add there are limitations to the analysis, as it did not include several other important factors impacting ethanol prices, such as domestic ethanol consumption and transportation costs.