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Inside the Black Box: the Price Linkage and Transmission between Energy and Agricultural Markets

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  • Du, Xiaodong

Abstract

Despite a growing literature on the integration of energy and agriculture, few have rigorously examined structural changes in the evolution of related energy and agricultural prices. Motivated by strong comovement and increasing volatility of energy and agricultural prices, we examine dynamic evolutions of ethanol, gasoline, and corn prices over the period of March 2005 – March 2011. A structural change is found around March 2008 in the pairwise dynamic correlations between the prices in a multivariate GARCH model. A structural VAR (SVAR) model is then estimated on two subsamples, one before and one after the identified change point. Using the novel method of “identification through heteroscedasticity”, we exploit the time-varying price volatilities to fully identify the SVAR model. In the more recent period, ethanol, gasoline, and corn prices are found to be more closely linked. Specifically, ethanol (corn) shocks have the largest impact on corn (ethanol) price. The strengthened corn-ethanol relation can be largely explained by the new developments of the biofuel industry and related policy instruments. Variance decomposition shows that for each market a significant and relatively large share of the price variation could be explained by the price changes in the other two markets. For example, corn price changes explain 27% of the variation of ethanol prices, and shocks to ethanol price account for 23% of the variance of corn prices. The results are robust to the inclusion of seasonal dummies, and various representative macroeconomic and financial indicators.

Suggested Citation

  • Du, Xiaodong, 2012. "Inside the Black Box: the Price Linkage and Transmission between Energy and Agricultural Markets," 2012 Conference, August 18-24, 2012, Foz do Iguacu, Brazil 125146, International Association of Agricultural Economists.
  • Handle: RePEc:ags:iaae12:125146
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    Cited by:

    1. Jiang, Jingze & Marsh, Thomas L. & Tozer, Peter R., 2015. "Policy induced price volatility transmission: Linking the U.S. crude oil, corn and plastics markets," Energy Economics, Elsevier, vol. 52(PA), pages 217-227.
    2. Chia-Lin Chang & Chia-Ping Liu & Michael McAleer, 2016. "Volatility Spillovers for Spot, Futures, and ETF Prices in Energy and Agriculture," Tinbergen Institute Discussion Papers 16-046/III, Tinbergen Institute.
    3. McPhail, Lihong Lu & Du, Xiaodong & Muhammad, Andrew, 2012. "Disentangling Corn Price Volatility: The Role of Global Demand, Speculation, and Energy," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 44(03), pages 401-410, August.
    4. Annastiina Silvennoinen & Susan Thorp, 2016. "Crude Oil and Agricultural Futures: An Analysis of Correlation Dynamics," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 36(6), pages 522-544, June.
    5. López Cabrera, Brenda & Schulz, Franziska, 2016. "Volatility linkages between energy and agricultural commodity prices," Energy Economics, Elsevier, vol. 54(C), pages 190-203.
    6. da Silveira, Rodrigo Lanna F. & Mattos, Fabio L., 2015. "Price And Volatility Transmission In Livestock And Grain Markets: Examining The Effect Of Increasing Ethanol Production Across Countries," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 205684, Agricultural and Applied Economics Association.
    7. Asche, Frank & Oglend, Atle, 2016. "The relationship between input-factor and output prices in commodity industries: The case of Norwegian salmon aquaculture," Journal of Commodity Markets, Elsevier, vol. 1(1), pages 35-47.
    8. repec:gam:jeners:v:11:y:2018:i:6:p:1595-:d:153161 is not listed on IDEAS
    9. Chia-Lin Chang & Yiying Li & Michael McAleer, 2018. "Volatility Spillovers between Energy and Agricultural Markets: A Critical Appraisal of Theory and Practice," Energies, MDPI, Open Access Journal, vol. 11(6), pages 1-19, June.
    10. Valentina G. Bruno & Bahattin Büyükşahin & Michel A. Robe, 2017. "The Financialization of Food?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 99(1), pages 243-264.
    11. Wang, Sun Ling & McPhail, Lihong, 2014. "Impacts of energy shocks on US agricultural productivity growth and commodity prices—A structural VAR analysis," Energy Economics, Elsevier, vol. 46(C), pages 435-444.
    12. Matteo Manera, Marcella Nicolini, and Ilaria Vignati, 2013. "Financial Speculation in Energy and Agriculture Futures Markets: A Multivariate GARCH Approach," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    13. Jeremy G. Weber & Nigel Key & Erik O’Donoghue, 2016. "Does Federal Crop Insurance Make Environmental Externalities from Agriculture Worse?," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 3(3), pages 707-742.
    14. Algieri, Bernardina, 2014. "The influence of biofuels, economic and financial factors on daily returns of commodity futures prices," Energy Policy, Elsevier, vol. 69(C), pages 227-247.
    15. Regmi, Madhav & Featherstone, Allen M., 2017. "U.S. Energy Price Volatility Spillover in Global Corn Markets," 2017 Annual Meeting, February 4-7, 2017, Mobile, Alabama 252776, Southern Agricultural Economics Association.
    16. Deborah Bentivoglio & Adele Finco & Mirian Rumenos Piedade Bacchi, 2016. "Interdependencies between Biofuel, Fuel and Food Prices: The Case of the Brazilian Ethanol Market," Energies, MDPI, Open Access Journal, vol. 9(6), pages 1-16, June.
    17. Bentivoglio, Deborah & Finco, Adele & Bacchi, Mirian, 2015. "Examining Price Transmission between Fuels and Food Prices: the Brazilian Sugar-Ethanol Market," 2015 Conference, August 9-14, 2015, Milan, Italy 211327, International Association of Agricultural Economists.
    18. Serra, Teresa & Zilberman, David, 2013. "Biofuel-related price transmission literature: A review," Energy Economics, Elsevier, vol. 37(C), pages 141-151.
    19. Juan P. Sesmero & Richard K. Perrin & Lilyan E. Fulginiti, 2016. "A Variable Cost Function for Corn Ethanol Plants in the Midwest," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 64(3), pages 565-587, September.

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    Resource /Energy Economics and Policy;

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    • F0 - International Economics - - General

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