SHORT-RUN DENSITY FORECAST FOR ETHANOL AND MTBE PRICES - PowerPoint by naq52275

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									   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
                                                   1
           Arlington, VA, June 24-25, 2004
                     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




                                  1.40
             Dollars per Gallon




                                  1.20




                                  1.00




                                  0.80




                                  0.60




                                  0.40
                                     Nov-94   Mar-96   Jul-97   Dec-98           Apr-00          Sep-01   Jan-03   Jun-04

                                                                 Ethanol Price      MTBE Price


•   Ethanol and MTBE prices are available from Hart’s Oxy-Fuel News. Wholesale gasoline price is available                  4
    from the Energy Information Agency (EIA) of the U.S. Department of Energy (DOE).
       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       M
                         Ft  At
   MAPE 
          M
                 t 1      At
                                 *100


                                                                       6
                       Augmented Dickey Fuller and
                       Johansen Co-integration Tests
Augmented Dickey Fuller Test for Stationarity.

                                                                                  • Co-integrating Equation
Variable                         Levels*        First Difference**
Ethanol Price                      -2.48                -4.98                     MTBE Pricet = 0.8454 Ethanol Pricet + 0.1365
MTBE Price                         -1.95                -10.12                                 (-5.4983)
Wholesale Gasoline
    Price                          -1.55                -9.93
* 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
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
Trace test indicates 2 co-integrating equation(s) at the 5% level
                                                                                                                       7
Trace test indicates 1 co-integrating equation(s) at the 1% level
                    Ethanol and MTBE Price VEC
                             Equations
Out of Sample MTBE Price MAPE 6 %

MTBE Price                              Coefficient        Std. Error           T-Statistic   Prob.
MTBE Price t-2                            -0.3055            0.0714              -4.2808      0.0000
MTBE Price t-4                            -0.2914            0.0764              -3.8146      0.0002
Ethanol Price t-3                         0.3147             0.1046               3.0069      0.0030
Wholesale Gasoline Price t                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 Price t-2                            -0.1799            0.0566              -3.1809      0.0017
MTBE Price t-3                            -0.2191            0.0519              -4.2185      0.0000
Ethanol Price t-1                         0.3489             0.0775               4.5018      0.0000
Ethanol Price t-2                         -0.1925            0.0839              -2.2950      0.0228
Ethanol Price t-3                         0.3242             0.0802               4.0449      0.0001
Ethanol Price t-4                         -0.2181            0.0744              -2.9321      0.0038
Constant                                  -1.1591            0.4367              -2.6540      0.0086
Wholesale Gasoline Price t                0.4011             0.0808               4.9664      0.0000
Subsidy t                                 2.1642             0.8150               2.6555      0.0086
                                                                                                       8
R-squared                                 0.5786      Durbin-Watson Statistic                 1.8606
                       Ethanol and MTBE Price Forecasts
                           Oct. 2003 to Sept. 2005
                     1.8
                                                                              Out of
                                         Historical Prices                   Sample     Forecasted Prices
                     1.6
                                                                             Forecast
                                                                              Period
                     1.4
Dollars per Gallon




                     1.2


                      1


                     0.8

                     0.6


                     0.4
                       Nov-94   Mar-96   Jul-97   Dec-98   Apr-00   Sep-01     Jan-03   Jun-04   Oct-05

                                         Ethanol Price     MTBE Price        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   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
                                                                                                           10     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
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      1.15          1.20       1.25        1.30   1.35      1.40

                        Ethanol Price January 2004                                                    Ethanol Price July 2005




  0.90    1.00      1.10            1.20          1.30      1.40    1.50   0.80      0.90          1.00            1.10          1.20      1.30
                                                                                                                                                         11
                           MTBE Price January 2004                                                        MTBE Price July 2005
          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         Jun-05      Oct-05

                    Average                5th Percentile            25th Percentile
                    75th Percentile        95th 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         Jun-05      Oct-05

                    Average              5th Percentile            25th Percentile
                    75th Percentile      95th 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

								
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