Price Fluctuations And Its Effects Between Energy And Corn Markets

Crude oil has always been an important strategic material for national economic growthand social development, and energy security matters the pace of social progress. However,from the perspective of worldwide energy reserves and consumptions, as the growth ofinternational economy relys on crude oil significantly, the production of crude oil expends butreserves reduces, which leads to price rising of crude oil. Due to the non-renewable propertyand price rsing trend of crude oil, most countries worldwide especially developed countriesand emerging economies are devoted to develop new energy. In this background, as theimportant renewable and clean energy, fuel ethanol based on corn and sugarcane ishighlighted and paid attention to under the dual pressure of ecological and environmentaldeterioration. Generally, crude oil is a vital energy input for agricultural production, becausecrude oil impacts on agriculture from several parts including production, transportation andconsumption. Therefore, the price increase of crude oil is an important driving force of cornprice rising. On the other hand, as the production of fuel ethanol is mainly based on foodcrops such as corn, it is acknowledged that the rapid development of fuel ethanol is closed tocorn industry, and promotes corn price rising to some extent. Due to fuel ethanol, the originalrelationship between crude oil prices and corn prices, that is, crude oil prices impact on cornprices significantly, has been changed, because corn prices could exert force to crude oilprices through fuel ethanol production.Compared to North American countries, South American countries, European countriesand less developend countries in Africa, the China is a country that is lack of advantage in theterm of agricultural resources endowment. Since2004, China has become the world’s largestimporter of agricultural products and agricultural net importer. Meanwhile, crude oil pricesvolatilities and the change of grain structure induced by new energy development, has becomean important inputing factor that depresses the China’s agricultural internationalcompetitivenesses. Therefore, under the background of new energy expansion, accurateunderstanding the relationship and transformation mechanism between energy and the cornprices fluctuations, analyzing and measuring volatility relations between the two markets, andproposing solutions from the perspective of optimizing policies have great significance. Based on energy crisis and challenges, chapter two and three in this paper analyze thestatus of international and China’s crude oil and corn. Given the maldistribution ofinternational crude oil and highly dependence on important of the China’s crude oil, as well asthe dominant role of the U.S. in world’s corn market and the production, consumption, importand export of new energy, chapter four of this thesis analyzes the integration relationshipbetween energy and corn prices voaltilities, and the impact of international energy prices oncorn prices employing international crude oil prices, the U.S. fuel ethanol prices, China’s cornprices and VEC model. The results show that international enery prices and China’s cornprices are highly integrated. The results of VEC model show that no matter in the short run orlong run, the international crude oil and fuel ethanol prices play granger causal roles onChina’s corn prices. Traditional OLS regression results imply that international crude oilprices rise1%, domestic corn prices will rise0.4403%. However, the coefficient between fuelethanol and corn prices is0.0495, which is only significant on statistical level, but is notsignificant on economic level.Under the China’s economic system and background, the volatilities characteristics andrelations of crude oil, corn and fuel ethanol prices are different from the international market.Concerning this point, chapter five of this thesis studies the volatilities characteristics andrisks of China’s crude oil, corn and fuel ethanol prices using GARCH, ARCH-M andEGARCH models, respectively. The results imply that In China, the prices volatilies of crudeoil, corn and fuel ethanol demonstrate significant ARCH effects, meaning the pricesvolatilities of crude oil, corn and fuel ethanol are predictable to some extent. Crude oil andcorn markets reflect the characteristic of high return for high risk, which imply rationalinvestment decisions of traders on crude oil and corn markets. However, due to fiscal subsidyeffects, fuel ethanol market does not reflect the characteristic of high return for high risk.Meanwhile, for corn and fuel ethanol markets, the volatilities caused by prices decrease arelarger than the volatilities due to prices increase. Therefore, stabilizing fuel ethanol and cornmarkets, government should pay much more attention to the factors causing declince in prices.Based on literature reviews and evaluations, we find that the view that the crude oil pricessignificantly impact on corn prices has been acknowledged, however, the volatilities amongcrude oil, corn and fuel ethanol markets vary for different countries and data. Therefore,chapter six of this thesis analyzes the spillover effects among China’s crude oil, corn and fuelethanol markets employing BEKK-MVGARCH model. The results demonstrate that there issiginicant static volatility spillover effect between domestic energy and corn markets. Due tothe policy of promoting clean energy, important role of corn in fuel ethanol fermentation andthe nationwide promotion of fuel ethanol adding into gasoline, in the sampling period, thers are obvious double directional spillover effects between fuel ethanol market and corn market,and one-way volatility spillover effects from crude oil to corn and fuel ethanol markets,respectively. As one of important input elements, crude oil prices impact corn prices has beenrecognized, which is verified in this thesis.Because static model is difficult to express dynamic change over time among variables,chapter seven of this thesis construct dynamic models using phased BEKK-MVGARCHmodel and DCC-MVGARCH model to analyze the dynamic linkage effects between energyand corn markets. The results show that there is a significant dynamic difference betweenenery market and corn market with time-varying. The empirical results show that breakpointshappen on July18,2008, August22,2008and October10,2008on crude oil, corn and fuelethanol markets, respectively. Based on the breakpoints results, we separate our sample intotwo pieces: from September,2003to October,2008, and from June,2008to June,2013. TheBEKK-MVGRCH models for different period imply that between September,2003andOctober,2008, there are one-way volatility spillover effects from crude oil to corn and fuelethanol markets and one-way volatility spillover from fuel ethanol market to corn market,respectively. However, between June,2008and June,2013, there exist obvious doubledirectional spillover effects between any two markets among crude oil, corn and fuel ethanolmarkets. The results of AR(1)-DCC-MVGARCH(1,1) find that although there is no dynamicrelationship among crude oil, corn and fuel ethanol markets before the first half year of2008,a significant dynamic relationship among crude oil, corn and fuel ethanol markets happensafter the second half year of2008. And for the second period, we can see that the dynamiccorrelation coefficient increases obviously, which means coordination degree among threemarkets is enhanced, and market segmentations are reduced.The chapter eight employs scenario simulation to analyze the impact of crude oil pricesrising on China’s fuel ethanol’s development and grain security. The results imply that theproduction of fuel ethanol will increase rapidly with crude oil price increase accoding to theresults of scenario simulation. Meanwhile, without government intervention, the prices risingof crude oil and expension of fuel ethanol will burden peoples’s living cost, impacting theirwelfares. The results of scenario simulation show that if we just consider domestic energydemanding, regardless of peoples’s living cost rising and ecological deterioration, the positiveimpacts of the development of fuel ethanol will significantly outweigh its negative ones.The main innovations of this study can be illustrated as:(1) Based on non-renewableenergy crisis and new energy expension, combining crude oil, new energy and grainproduction, this thesis analyzes the impact of non-renewable energy crisis and new energyexpension on China’s corn prices.(2) This thesis applies the ARCH, BEKK-MVGARCH, and DCC-MVGARCH models into the research concerning the relationship between energy andgrain prices, which breaks through the application field of ARCH series models.(3) A largenumber of foreign researches imply that the volatilites of a variety of grain prices move alongthe same direction at the same time. Therefore, this thesis analyzes the speed of fuel ethanol,corn and other food prices volatilities according to the degree of crude oil prices rising, andexamines the effects of crude oil crisis and fuel ethanol development on China’s grain security.