Ethanol is a source of imperfect price transmission in the food supply chain.
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Ethanol alters price transmission only under a binding blender's tax credit and only from food to corn (not vice versa).
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Ethanol weakens the response of corn and food prices in terms of their level changes to shocks occurring in corn and food markets.
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In the presence of ethanol, the imperfect price transmission may occur even if markets are perfectly competitive.
Abstract
This paper analyzes the impact of ethanol policies on price transmission along the food supply chain. We consider the US corn sector and its vertical links with food and ethanol (energy) markets. We find that ethanol is a source of imperfect price transmission in the food supply chain. Ethanol, however, alters price transmission only under a binding blender's tax credit and only from food to corn (not vice versa). Our results indicate that ethanol weakens the response of corn and food prices in terms of their level changes to shocks occurring in agricultural (corn and food) markets. The results are robust to different assumptions on the model parameters. Although market power has previously been identified as a source of imperfect price transmission in the food supply chain, our findings show that in the presence of ethanol, the imperfect price transmission may occur even if markets are perfectly competitive. This warrants careful evaluation of markets before any policy intervention.
The authors are solely responsible for the content of the paper. The views expressed are purely those of the authors and may not in any circumstances be regarded as stating an official position of the European Parliament or the European Commission. This work was supported by the Czech Science Foundation (GACR) under the grant number 16-02760S and by the USDA AFRI initiative Grant No 2014-67023-21820.
