SHORT-RUN DENSITY FORECAST FOR ETHANOL AND MTBE PRICES

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SHORT-RUN DENSITY FORECAST FORETHANOL AND MTBE
PRICES

• Michael H. Lau
• Joe L. Outlaw
• James W. Richardson
• Brian K. Herbst
• Texas AM University
• Department 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 Harts
  Oxy-Fuel News. Wholesale gasoline price is
  available from the Energy Information Agency
  (EIA) of the U.S. Department of Energy (DOE).

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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. Source Energy Information Agency, U.S. Department of Energy. Source Energy Information Agency, U.S. Department of Energy. 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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Augmented Dickey Fuller and Johansen
Co-integration Tests
Augmented Dickey Fuller Test for Stationarity. Augmented Dickey Fuller Test for Stationarity. Augmented 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. Fail to reject "Ho Data series is non-stationary" at 1 significance level. Fail to reject "Ho Data series is non-stationary" at 1 significance level.
Reject "Ho Data is non-stationary at 1 significance level. Reject "Ho Data is non-stationary at 1 significance level. Reject "Ho Data is non-stationary at 1 significance level.

• Co-integrating Equation

Johansen Unrestricted Co-integration Rank Test Johansen Unrestricted Co-integration Rank Test Johansen Unrestricted Co-integration Rank Test Johansen Unrestricted Co-integration Rank Test
         
Hypothesized Trace 5 Percent 1 Percent
No. of CE(s) Eigenvalue Statistic Critical 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 () denotes rejection of the hypothesis at the 5(1) level () denotes rejection of the hypothesis at the 5(1) level () 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 2 co-integrating equation(s) at the 5 level Trace test indicates 2 co-integrating equation(s) at the 5 level Trace test indicates 2 co-integrating equation(s) at the 5 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 Trace test indicates 1 co-integrating equation(s) at the 1 level Trace test indicates 1 co-integrating equation(s) at the 1 level Trace test indicates 1 co-integrating equation(s) at the 1 level Trace test indicates 1 co-integrating equation(s) at the 1 level
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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 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 Durbin-Watson Statistic 1.8606
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Ethanol and MTBE Price Forecasts Oct. 2003 to
Sept. 2005
Out of Sample Forecast Period
Historical Prices
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
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Fan Graph for Ethanol Price Oct. 2003 to Sept.
2005
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Fan Graph for MTBE Price Oct. 2003 to Sept. 2005
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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.