Dynamic Price Relationships in the Grain and Cattle Markets, Pre and Post-Ethanol Mandate

This paper determines the dynamic interaction between prices of corn, soybean, grain sorghum (milo), wheat, feeder cattle and live (fed) cattle by taking into account the surge in corn consumption stemming from the boost of mandated ethanol production. Corn is a major carbohydrate-feed component of livestock, with grain sorghum and wheat serving as close substitutes. Moreover, soybean is an important protein-feed component. Being non-stationary data, a vector autoregressive (VAR) model (Sims, 1980) that includes an ‘error correction’ term is applied to the series; likewise known as a vector error correction (VEC) model (Engel and Granger, 1987 and Johansen, 1989). Two separate periods are estimated. The first considers prices prior to recent ethanol mandates. The second includes increased corn consumption from ethanol production, mandated by Energy Policy Acts of 2005 and 2007. Results are consistent with past literature regarding feeder and live cattle prices, among others. More importantly, we find support for the notion of modified feed rations in feedlot operations, given the increased corn prices following the post-ethanol mandated period. The finding is corroborated by two different methods, one via Granger Causality and other via impulse response functions.