Price Volatility, Nonlinearity, and Asymmetric Adjustments in Corn, Soybean, and Cattle Markets: Implications of Ethanol-Driven (Market) Shocks

Grain prices have risen sharply since 2005 and 2006 affecting livestock markets by increasingfeed prices and leading to significant volatility shocks. The high price levels and magnitude ofsustained high volatilities has raised concerns for many sectors of the economy, in particularthose with direct relation to these markets. Policy makers are analyzing the interrelationshipsamong these markets, and the effects of energy market shocks on agricultural markets. This studyconsiders a threshold structure in a multivariate time-series model that evaluates these marketlinkages, capturing asymmetric correlations between grain and livestock prices, includingvolatility spillovers. We empirically study the impact of corn usage for ethanol production in theevolution of the above mentioned prices. Results are compared to previous scenarios wherecorn, soybean and livestock production and consumption did not face the corn demand forethanol production. We find positive dynamic correlations between corn and soybean and feederand fed cattle prices, consistent with the literature. And we find an inverse or negative relationbetween corn and feeder/calf prices for the period post mandated ethanol production, asanticipated by the literature for increased corn prices. Also, we find there are adjustment costsinhibiting price transmission between the crops and the live cattle market, in the form ofmodifying feeding rations. More relevantly, we identify plausible asymmetric effect on thecorrelations between the markets, especially when considering the period for the ethanol drivencorn consumption versus previous periods of corn consumption. These asymmetric correlationsare the result of spillover effects.