Analysis of Interdependencies of (Fossil)-Energy, Bioenergy and Agricultural Commodity Prices
July 8, 2011http://dx.doi.org/10.1016/j.reseneeco.2010.07.004
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A "lively debate" and controversy has reportedly resulted when the increase in food prices in 2007 to 2008 were attributed to the biofuels development (which was stimulated by rising fossil fuel prices). "The simultaneous increase in price volatility and agricultural commodity markets" raises the question about the possible link between fossil energy and agricultural prices.
Researchers from European Commission (DG Joint Research Centre) and Belgium (Catholic University of Leuven (LICOS) and the Economics and Econometrics Research Institute (EERI)) investigated the interdependencies of energy, bioenergy and agricultural commodity markets, using both theoretical and empirical approaches. In the theoretical approach, they extended existing models which developed a "vertical market integration model of ethanol, by-product, and corn markets." These extensions included (among others) the expansion of agricultural commodities from one to two, and the expansion of applicability to world markets (not only in the US). The empirical approach, which was based on cointegration analysis (related information below), "examined the existence of a long-run relationship between crude oil and agricultural commodity prices", by applying an error correction estimation procedure.
Some highlights of their results are: (1) empirical findings support the theoretical hypothesis that the prices for crude oil and agricultural commodities are interdependent, (2) an increase in oil price by 1$/barrel increases the agricultural commodity prices between $0.10/tonne and $1.80/tonne, (3) the indirect input channel of price transmission is found to be small and statistically insignificant, which is contrary to theoretical predictions. The full paper is published in the journal, Resource and Energy Economics (URL above).
Related information on co-integration analysis: http://www.econ.ku.dk/okokj/papers/dfhkjfnl.pdf
http://www.econ.ku.dk/okokj/papers/kjdhengii.pdf
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