Price Relationships of Crude Oil and Food Commodities

Abstract

World agricultural markets have featured unusual price peaks and volatility in the last years. It has been argued that the previously unseen price movements in food prices are related to price peaks of crude oil, where biofuel production is suspected to have created a new link between crude oil and food prices. In this paper we present new evidence on the relationship of food and oil prices. Past investigations on this relationship have mainly applied linear cointegration analysis. However, recent methodological innovations in cointegration analysis allow for a more thorough analysis of the co-movement of commodity prices, detecting asymmetric and thresholds co-movements. These techniques give additional information about the dynamics of price relationships and can identify co-movements that earlier linear cointegration analysis could not detect. Our results indicate that increased biofuel use did indeed create new links between prices foods and crude oil, especially so for those food products that have been used to produce biofuel. This finding is surely relevant for policy-making regarding biofuels and should be taken into account when designing programs to incentivize biofuel production and consumption.