The Ethanol Market and Its Relation to the Price of Agricultural Commodities

Abstract

In this article, we seek to present the synthesis of the global ethanol market in the United States (US) and Brazil by using caloric equivalence to empirically characterize the elasticity of supply and demand. We also seek to evaluate the relationship between world ethanol production and prices of agricultural commodities (wheat, rice, corn, soybeans and sugar) from 1981 to 2016 using climate-induced yield shocks as instrumental variables. The main results for the world market indicate that the production and demand for ethanol respond elastically to changes in commodity prices. The world ethanol production has no significant relationship with food prices. However, evaluation of the ethanol market and its interaction with the agricultural commodities market confirms the hypothesis that Brazilian ethanol is weakly related to the price of food.