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SHORT-RUN DENSITY FORECAST FOR

ETHANOL AND MTBE PRICESMichael H. LauJoe L. Outlaw

James W. RichardsonBrian K. Herbst

Texas A&M UniversityDepartment of Agricultural Economics

Agriculture as a Producer and Consumer Energy Conference

Arlington, VA, June 24-25, 2004

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Introduction

• Rapidly increasing ethanol production.– The National Energy Act exemption and the Clean Air

Act of 1990 aided ethanol growth.• Gallagher, et. al. (2003) and Lidderdale (2000)

looked at long run effects of renewable fuel standards.

• Ethanol price determined by wholesale gasoline price and the excise tax exemption on blended gasoline (Coltrain, 2001; CFDC, 2004; NDLC, 2001).

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Objectives and Methods

• Create short-run probabilistic (density) forecasts for ethanol and MTBE prices for a 24-month period from October 2003 to September 2005.– Why probabilistic (density) forecasts?

• The results from this study will provide interested parties an unbiased analysis and forecast of ethanol and MTBE prices as production and demand for ethanol continues to grow.

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Historical Ethanol and MTBE Price Nov. 1994 to Sept. 2003

• Ethanol and MTBE prices are available from Hart’s Oxy-Fuel News. Wholesale gasoline price is available from the Energy Information Agency (EIA) of the U.S. Department of Energy (DOE).

0.40

0.60

0.80

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Nov-94 Mar-96 Jul-97 Dec-98 Apr-00 Sep-01 Jan-03 Jun-04

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Ethanol Price MTBE Price

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Summary Statistics for Ethanol and MTBE Prices Nov. 1993 to

Sept. 2003       

Ethanol Price MTBE Price Wholesale Gasoline Price

Mean 1.22 0.90 0.76

Standard Deviation 0.18 0.22 0.18

95 % LCI 1.19 0.86 0.72

95 % UCI 1.26 0.94 0.79

CV 14.88 24.20 23.27

Min 0.94 0.47 0.43

Median 1.20 0.87 0.73

Max 1.71 1.56 1.15

Autocorrelation Coefficient 0.92 0.86 0.93

Source: Energy Information Agency, U.S. Department of Energy.

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Other Exogenous Variables Considered for Forecasting

• Retail gasoline price, ethanol fuel demand, gasoline production, diesel price, diesel production, gasoline stock, diesel stock, oil production, oil imports, oxygenated gasoline production, reformulated gasoline production, oxygenate stock, corn prices, and corn production.

• None were statistically significant and did not improve the forecasting abilities of the VEC model based on the mean absolute percent error (MAPE)

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1*100

Mt t

t t

F AMAPE

M A

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Augmented Dickey Fuller and Johansen Co-integration Tests

• Co-integrating EquationAugmented Dickey Fuller Test for Stationarity.

     

Variable Levels* First Difference**

Ethanol Price -2.48 -4.98

MTBE Price -1.95 -10.12

Wholesale Gasoline Price -1.55 -9.93

* Fail to reject "Ho: Data series is non-stationary" at 1 % significance level.

** Reject "Ho: Data is non-stationary at 1% significance level.

Johansen Unrestricted Co-integration Rank Test

         

Hypothesized Trace 5 Percent 1 Percent

No. of CE(s) Eigenvalue StatisticCritical Value Critical Value

None ** 0.16 22.37 15.41 20.04

At most 1 * 0.04 4.10 3.76 6.65

*(**) denotes rejection of the hypothesis at the 5%(1%) level  

Trace test indicates 2 co-integrating equation(s) at the 5% level

Trace test indicates 1 co-integrating equation(s) at the 1% level

t tMTBE Price = 0.8454 Ethanol Price + 0.1365(-5.4983)

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Ethanol and MTBE Price VEC Equations

 Out of Sample MTBE Price MAPE 6 %        

MTBE Price Coefficient Std. Error T-Statistic Prob.

MTBE Pricet-2 -0.3055 0.0714 -4.2808 0.0000

MTBE Pricet-4 -0.2914 0.0764 -3.8146 0.0002

Ethanol Pricet-3 0.3147 0.1046 3.0069 0.0030

Wholesale Gasoline Pricet 1.2086 0.1202 10.0575 0.0000

R-squared 0.5822 Durbin-Watson Statistic 1.9232

 Out of Sample Ethanol Price MAPE 8.6%        

Ethanol Price Coefficient Std. Error T-Statistic Prob.

Co-Integrating Eq.t-1 0.1953 0.0353 5.5356 0.0000

MTBE Pricet-2 -0.1799 0.0566 -3.1809 0.0017

MTBE Pricet-3 -0.2191 0.0519 -4.2185 0.0000

Ethanol Pricet-1 0.3489 0.0775 4.5018 0.0000

Ethanol Pricet-2 -0.1925 0.0839 -2.2950 0.0228

Ethanol Pricet-3 0.3242 0.0802 4.0449 0.0001

Ethanol Pricet-4 -0.2181 0.0744 -2.9321 0.0038

Constant -1.1591 0.4367 -2.6540 0.0086

Wholesale Gasoline Pricet 0.4011 0.0808 4.9664 0.0000

Subsidyt 2.1642 0.8150 2.6555 0.0086

R-squared 0.5786 Durbin-Watson Statistic 1.8606

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Nov-94 Mar-96 Jul-97 Dec-98 Apr-00 Sep-01 Jan-03 Jun-04 Oct-05

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Ethanol Price MTBE Price Wholesale Gas Price

Ethanol and MTBE Price Forecasts Oct. 2003 to Sept.

2005Historical Prices

Out of Sample Forecast Period

Forecasted Prices

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Simulation Summary Statistics Ethanol and MTBE Prices Oct. 2003 to Sept. 2005

Ethanol Price Mean

St. Dev. C.V.

Minimum

Maximum   MTBE Price Mean

St. Dev. C.V.

Minimum

Maximum

Oct-03 1.37 0.05 3.60 1.19 1.52   Oct-03 1.15 0.09 7.41 0.90 1.38

Nov-03 1.26 0.05 3.90 1.10 1.40   Nov-03 1.09 0.08 7.36 0.84 1.30

Dec-03 1.25 0.05 3.91 1.11 1.42   Dec-03 1.10 0.08 7.44 0.86 1.32

Jan-04 1.33 0.05 3.70 1.18 1.47   Jan-04 1.22 0.09 7.42 0.94 1.45

Feb-04 1.37 0.05 3.61 1.22 1.53   Feb-04 1.28 0.09 7.43 0.99 1.53

Mar-04 1.42 0.05 3.45 1.28 1.56   Mar-04 1.37 0.10 7.40 1.06 1.63

Apr-04 1.48 0.05 3.32 1.33 1.62   Apr-04 1.47 0.11 7.43 1.15 1.76

May-04 1.48 0.05 3.34 1.32 1.66   May-04 1.37 0.10 7.40 1.06 1.64

Jun-04 1.42 0.05 3.44 1.27 1.58   Jun-04 1.25 0.09 7.41 0.97 1.50

Jul-04 1.39 0.05 3.52 1.24 1.54   Jul-04 1.20 0.09 7.36 0.93 1.43

Aug-04 1.43 0.05 3.42 1.29 1.58   Aug-04 1.26 0.09 7.43 0.98 1.50

Sep-04 1.47 0.05 3.34 1.33 1.64   Sep-04 1.27 0.09 7.40 0.98 1.51

Oct-04 1.43 0.05 3.43 1.28 1.61   Oct-04 1.15 0.09 7.42 0.89 1.37

Nov-04 1.39 0.05 3.56 1.18 1.55   Nov-04 1.15 0.09 7.41 0.89 1.38

Dec-04 1.38 0.05 3.53 1.24 1.54   Dec-04 1.13 0.08 7.43 0.88 1.35

Jan-05 1.36 0.05 3.62 1.17 1.52   Jan-05 1.15 0.09 7.41 0.89 1.37

Feb-05 1.34 0.05 3.66 1.20 1.49   Feb-05 1.21 0.09 7.40 0.94 1.44

Mar-05 1.34 0.05 3.62 1.21 1.49   Mar-05 1.25 0.09 7.42 0.97 1.49

Apr-05 1.35 0.05 3.65 1.19 1.50   Apr-05 1.31 0.10 7.42 1.02 1.56

May-05 1.32 0.05 3.71 1.18 1.46   May-05 1.26 0.09 7.43 0.98 1.50

Jun-05 1.28 0.05 3.83 1.14 1.44   Jun-05 1.18 0.09 7.36 0.92 1.41

Jul-05 1.23 0.05 3.99 1.08 1.38   Jul-05 1.08 0.08 7.39 0.84 1.29

Aug-05 1.23 0.05 4.02 1.04 1.39   Aug-05 1.12 0.08 7.39 0.87 1.34

Sep-05 1.26 0.05 3.87 1.11 1.41   Sep-05 1.18 0.09 7.38 0.92 1.41

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PDF Graphs for Ethanol and MTBE Prices Jan. 2004 and July

2005

1.15 1.20 1.25 1.30 1.35 1.40 1.45 1.50

Ethanol Price January 2004

1.05 1.10 1.15 1.20 1.25 1.30 1.35 1.40

Ethanol Price July 2005

0.90 1.00 1.10 1.20 1.30 1.40 1.50

MTBE Price January 2004

0.80 0.90 1.00 1.10 1.20 1.30

MTBE Price July 2005

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Fan Graph for Ethanol Price Oct. 2003 to Sept. 2005

Ethanol Price

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1.5

1.6

Oct-03 Feb-04 Jun-04 Oct-04 Feb-05 Jun-05 Oct-05

Average 5th Percentile 25th Percentile

75th Percentile 95th Percentile

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Fan Graph for MTBE Price Oct. 2003 to Sept. 2005

MTBE Price

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Oct-03 Feb-04 Jun-04 Oct-04 Feb-05 Jun-05 Oct-05

Average 5th Percentile 25th Percentile

75th Percentile 95th Percentile

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Conclusions and Questions

• VEC is successfully for forecasting Ethanol and MTBE Prices from Oct. 2003 to Sept. 2005.

• Simulation is beneficial for predicting density forecasts of ethanol and MTBE prices.

• Limitations of Study– Dependent on forecasted values of wholesale

gasoline price.– Perpetual forecast should be used where the

coefficients are updated as realized prices occur for ethanol, MTBE, and wholesale gasoline.