Biofuels and Vertical Price Transmission: The Case of the U.S. Corn, Ethanol, and Food Markets

This is the first paper to analyze the impact of biofuels on the price transmission along the food chain. Specifically, we analyze the U.S. corn sector and its vertical links to food and ethanol markets. The key result of this paper is that the presence of biofuels affects the price transmission elasticity only when the blender's tax credit is binding and the shock originates in the food market. Our another important result is that the response of corn and food prices to exogenous shocks in the corn or food markets is always lower in the presence of biofuels when the tax credit is binding. However, the results are mixed for the binding mandate. The sensitivity analyses indicate that our results are robust to different assumptions about the model parameters.