Did the entry of the corn ethanol industry in Brazil affect the relationship between domestic and international corn prices?

Abstract

This study investigates the relationship between corn prices in Brazil and the international market, considering a rise in corn ethanol production in Brazil's Midwest region since 2017. Did the entry of the corn ethanol industry in Brazil affect the relationship between domestic and international corn prices? A cointegration analysis was made with a monthly time series from May 2005 to August 2023 controlling for different exogenous events or shocks that may have affected global agricultural markets. The study's findings indicate a stable long-term relationship between the international and Brazilian corn prices, with changes in international prices being predictors of variations in Brazilian domestic prices, while the opposite was not statistically supported. The study also found no evidence to support the claim that the entry of the corn ethanol industry into Mato Grosso state in 2017 impacted the prices paid to local producers. Therefore, the increase in Brazilian corn prices cannot be attributed to additional demand for corn by local mills, an important result that contributes to discussions such as food versus fuel and indirect land use change.