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Price formation in the German biodiesel supply chain: a Markov-switching vector error-correction modeling approach
Article first published online: 6 JUN 2012
© 2012 International Association of Agricultural Economists
Volume 43, Issue 5, pages 545–560, September 2012
How to Cite
Busse, S., Brümmer, B. and Ihle, R. (2012), Price formation in the German biodiesel supply chain: a Markov-switching vector error-correction modeling approach. Agricultural Economics, 43: 545–560. doi: 10.1111/j.1574-0862.2012.00602.x
- Issue published online: 7 AUG 2012
- Article first published online: 6 JUN 2012
- Received 4 November 2010; received in revised form 10 August 2011; accepted 6 February 2012
- Cointegration, Regime-dependent model;
- Markov-switching vector error-correction
Changing linkages between agricultural and energy markets have attracted considerable attention in research and policy discussions during recent years. As one of the largest biofuel markets worldwide, the German biodiesel market is of particular interest. It has grown rapidly since the beginning of the new millennium, with this growth being driven mainly by political interventions. Vertical price transmission channels along the biodiesel supply chain are analyzed in this study. We examine the relationship between diesel and biodiesel prices, and between rapeseed oil, soy oil, and biodiesel prices between 2002 and 2008. Due to pronounced changes in market conditions and the policy framework, a regime-dependent Markov-switching vector error-correction model is used. The regimes are characterized by markedly different price adjustment behaviors. Before 2005 and from late 2007 onward, a regime characterized by the strong orientation of biodiesel prices toward diesel prices dominates. Between 2005 and 2007, biodiesel and rapeseed oil prices are mutually interdependent. Frequent switches between the regimes of the price dynamics during this period indicate a high extent of uncertainty and instability in the market.