SHORT-RUN DENSITY
FORECAST FOR
ETHANOL AND MTBE PRICES
Michael H. Lau
Joe L. Outlaw
James W. Richardson
Brian K. Herbst
Texas A&M University
Department of Agricultural Economics
Agriculture as a Producer and Consumer Energy
Conference
Arlington, VA, June 24-25, 2004
1
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).
2
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.
3
Historical Ethanol and MTBE Price
Nov. 1994 to Sept. 2003
1.80
1.60
Dollars per Gallon
1.40
1.20
1.00
0.80
0.60
0.40
Nov-94
Mar-96
Jul-97
Dec-98
Ethanol Price
•
Apr-00
Sep-01
Jan-03
Jun-04
MTBE Price
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).
4
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.
5
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)
1
MAPE 
M
M

t 1
Ft  At
*100
At
6
Augmented Dickey Fuller and
Johansen Co-integration Tests
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
• Co-integrating Equation
MTBE Pricet = 0.8454 Ethanol Pricet + 0.1365
(-5.4983)
* 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
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
No. of CE(s)
*(**) 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
7
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
8
Ethanol and MTBE Price Forecasts
Oct. 2003 to Sept. 2005
1.8
Out of
Sample
Forecast
Period
Historical Prices
Dollars per Gallon
1.6
Forecasted Prices
1.4
1.2
1
0.8
0.6
0.4
Nov-94
Mar-96
Jul-97
Dec-98
Ethanol Price
Apr-00
Sep-01
MTBE Price
Jan-03
Jun-04
Oct-05
Wholesale Gas Price
9
Simulation Summary Statistics Ethanol and
MTBE Prices Oct. 2003 to Sept. 2005
Ethanol Price
Mean
St. Dev.
C.V.
Minimum
Maximum
Oct-03
1.37
0.05
3.60
1.19
1.52
Nov-03
1.26
0.05
3.90
1.10
Dec-03
1.25
0.05
3.91
Jan-04
1.33
0.05
Feb-04
1.37
Mar-04
MTBE Price
Mean
St. Dev.
C.V.
Minimum
Maximum
Oct-03
1.15
0.09
7.41
0.90
1.38
1.40
Nov-03
1.09
0.08
7.36
0.84
1.30
1.11
1.42
Dec-03
1.10
0.08
7.44
0.86
1.32
3.70
1.18
1.47
Jan-04
1.22
0.09
7.42
0.94
1.45
0.05
3.61
1.22
1.53
Feb-04
1.28
0.09
7.43
0.99
1.53
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
Sep-05
1.26
0.05
3.87
1.11
1.41
Sep-05
1.18
0.09
7.38
0.92
10
1.34
1.41
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
1.05
1.10
1.00
1.10
1.20
1.30
MTBE Price January 2004
1.20
1.25
1.30
1.35
1.40
Ethanol Price July 2005
Ethanol Price January 2004
0.90
1.15
1.40
1.50
0.80
0.90
1.00
1.10
MTBE Price July 2005
1.20
1.30
11
Fan Graph for Ethanol Price Oct.
2003 to Sept. 2005
Ethanol Price
1.6
1.5
1.4
1.3
1.2
1.1
Oct-03
Feb-04
Jun-04
Oct-04
Feb-05
Average
5th Percentile
75th Percentile
95th Percentile
Jun-05
Oct-05
25th Percentile
12
Fan Graph for MTBE Price Oct. 2003
to Sept. 2005
MTBE Price
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1
0.9
Oct-03
Feb-04
Jun-04
Oct-04
Feb-05
Average
5th Percentile
75th Percentile
95th Percentile
Jun-05
Oct-05
25th Percentile
13
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.
14