Dec. 13 (Bloomberg) -- Oil prices were found to be the main drivers of ethanol and grain prices in a statistical analysis by the United Nations’ Food & Agriculture Organization.
Ethanol moves in line with oil in the long term, while the relationship is non-linear in the short term, based on a study of prices from January 1980 through to April 2012, FAO economists Natalia Merkusheva and George Rapsomanikis wrote in an online report via the Agricultural Market Information System.
About 40 percent of U.S. corn is used to make ethanol, according to the research paper. The economists studied the price relationship for ethanol coupled with oil and corn, as well as the connection between prices of corn, wheat and rice with oil.
“Although they can drift apart in the short run, market forces will ensure that prices will move together in the long run,” Merkusheva and Rapsomanikis wrote. Corn’s “co-movement with oil prices can be attributed to the industrial demand for maize by the ethanol industry,” they said.
The research implies a 10 percent rise in the oil price will result in a long-term climb in the price of ethanol of 4.5 percent, while a 10 percent gain for ethanol lifts corn prices by 14 percent in the long run, based on the study.
Prices of crops not used to make ethanol, such as rice, may move in connection with oil due to substitution between crops in food consumption, the economists said. Commodity prices also tend to move together due to non-fundamental factors such as changes in money supply, they wrote.
The U.S. government’s Renewable Fuels Standard mandate set a floor for ethanol use in gasoline, and up to that volume demand can be unrelated to oil and ethanol prices, according to the authors.
“Above the mandate, relative costs will determine ethanol demand,” Merkusheva and Rapsomanikis wrote. “Substitution possibilities link the price of ethanol, and possibly the price of maize and other grains, with the price of oil. In the long run, ethanol prices co-move with oil prices.”
The U.S. automotive fleet is made up mainly of vehicles that can run on gasoline blends that may contain as much as 10 percent ethanol, and above that threshold, the link between oil, ethanol and grain prices breaks, according to the study.
Analysis showed ethanol and corn operate as a system, with ethanol driving corn prices as well as the other way around, the FAO economists wrote.
Ethanol prices respond to changes in the oil prices in less than four months, the analysis showed. Corn prices will fully adjust to a change in price of ethanol in about 17 months, while the adjustment of ethanol to corn takes 12 months, according to Merkusheva and Rapsomanikis.
--Editors: Sharon Lindores, John Deane