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

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. La production de biocarburants est limitee au Canada, mais la disponibilite de paille de ble comme matiere premiere est une perspective interessante pour le developpement futur d'une industrie des biocarburants de deuxieme generation (c.‐a‐d. cellulosique). Le succes futur d'une telle industrie des biocarburants dependra des prix futurs de l'ethanol et des prix lies a la paille de ble. Ces prix sont susceptibles d'etre influences par les marches lies a l'industrie actuelle de l'ethanol de premiere generation aux Etats‐Unis. Par consequent, la motivation de cet article est d'etudier les relations entre les prix du ble canadien et les prix du mais, de l'ethanol et de l'essence aux Etats‐Unis. Nous utilisons un modele VEC ameliore DCC‐MGARCH pour etudier les relations variant dans le temps entre ces marches. Les resultats indiquent qu'il existe des relations positives entre les marches du ble et du mais, de l'ethanol et du mais, et du ble et de l'ethanol. Nos resultats contribuent a une meilleure comprehension du niveau d'integration entre certains marches agricoles canadiens et les marches energetiques americains. Plus precisement, les relations de prix identifiees mettent en evidence plusieurs sources de risque de prix qui peuvent affecter le succes financier de la production commerciale d'ethanol de deuxieme generation a partir de paille de ble au Canada. Ces informations seront particulierement interessantes pour les investisseurs potentiels et les decideurs politiques.