Prices for a second-generation biofuel industry in Canada: Market linkages between Canadian wheat and US energy and agricultural commodities

Abstract

The production of biofuels is limited in Canada, but the availability of wheat straw as a second-generation (i.e., cellulosic) feedstock is an exciting prospect for the future development of a biofuel industry. The future success of such a biofuel industry will depend on future ethanol prices and prices related to wheat straw. These prices are likely to be influenced by markets related to the existing first-generation ethanol industry in the United States. Therefore, the motivation of this paper is to investigate relationships between Canadian wheat prices and US corn, ethanol, and gasoline prices. We employ a DCC-MGARCH enhanced VEC model to investigate time-varying relationships among these markets. Results indicate that there are positive relationships between wheat and corn, ethanol and corn, and wheat and ethanol markets. Our results add to a better understanding of the level of integration between select Canadian agricultural markets and US energy markets. More specifically, the price relationships identified highlight several sources of price risk that may affect the financial success of commercially producing second-generation ethanol from wheat straw in Canada. This information will be of particular interest to prospective industry investors and policymakers.