Dynamic risk management strategies for and ethanol producer with impacts of ethanol production on the U.S. corn prices

This dissertation explores dynamic risk management strategies for an ethanol plant after considering impacts of ethanol production on the U.S. corn prices. The objectives of this research are to investigate coincidental impacts of ethanol production and exchange rates on the U.S. corn prices and to develop dynamic risk management strategies for an ethanol producer using the futures markets.;The significant growth in ethanol production and continuous depreciation of the dollar are important in explaining the corn prices over the last few years. However, the total impacts from ethanol and the dollar do not fully explain the increase in corn prices during the last 2 years. This suggests other factors have influenced corn prices in recent years. One factor often pointed to is speculative trade on the corn futures market. Another factor to consider is the low level of corn stocks during 2006 and 2007 marketing years.;Dynamic risk management strategies are developed to maximize an ethanol producer's utility function under various states of risks. By adopting the dynamic programming hedge model an ethanol firm can increase overall utility levels. To account for time varying volatility of price changes, bivariate GARCH (BGARCH) estimation is applied to obtain another set of optimal hedge ratios. From the analysis of hedging effectiveness, the BGARCH hedge strategy is found to be the most effective tool in reducing variance of profits. When considering both profit levels and variances, weighted by risk aversion levels, the BGARCH hedge with RBOB futures yields the highest utility level for all levels of risk aversion. The BGARCH hedge is dominant among all risk management methods studied in this research in terms of maximizing utility. This dominance comes from the property of the BGARCH model that concerns the time varying volatility of commodity prices.