The impact of biofuels policy on agribusiness stock prices

Abstract

Corn markets are important for many industries, including the seed, fertilizer, meat production/processing, and agricultural machinery sectors, all of which are highly concentrated. Oligopoly theory suggests that corn input and field equipment suppliers likely benefit from policies that support corn markets, such as U.S. biofuels policy, whereas meat companies likely lose. This study investigates the impact of biofuels policy on U.S. agribusiness stock prices. Corn futures prices are found to have had a structural change in November 2006, consistent with the expansion of U.S. biofuels policy support. A linear two-factor (S&P 500 and corn prices) equilibrium asset pricing model is estimated on two subsamples, one before and one after the estimated change point. Conditional heteroskedasticity in stock returns is accounted for using a GARCH(1,1) model. In the more recent period, corn price increases are found to have positive effects on excess stock returns for seed, fertilizer, and machinery companies, while the impact on meat companies is negative. The results may be interpreted as evidence that crop input suppliers gain from U.S. biofuels policies while meat processors lose. [EconLit citations: D43; L13; Q14]. © 2010 Wiley Periodicals, Inc.