Weather Shocks and the Sugar–Ethanol Nexus in Colombia

The connection between sugar and ethanol prices is in line with concerns about the connection between oil and food prices. This paper studies the nexus between Colombia’s ethanol and sugar prices and the role that weather shocks play. Data on production and prices from the sugar mills and climate data on precipitation and temperature are used to estimate two ways to capture the relationship between prices and the role of weather shocks. First, a reduced-form estimation is made, where the study finds evidence of the pass-through of the international price to domestic prices and how high precipitation and temperature shocks increase prices. Then, the study addresses potential simultaneity problems between prices and estimates a VEC model with exogenous variables such as weather shocks. Results show that all domestic prices are affected by the international price, and the international price is affected by the white sugar domestic prices. Additionally, sugar prices react to shocks in ethanol prices, but ethanol prices do not react to shocks in sugar prices. Finally, weather shocks affect sugar prices, with daytime temperature shocks being the most damaging.