Comovement In Crude Oil And Biofuel Markets PDF Download

The 2007-2008 food crisis had severe political, economic, and social consequences worldwide and shed light on the new existing integration between energy and agricultural commodity markets. Scholars subsequently analyzed the factors that had given raise to this integration and were particularly interested in the contribution of the three price transmission channels: the cost, financialization, and substitution channel. Using daily futures prices over the period from January 1990 to December 2014 for twenty-four US commodities, the study at hand extends the existing research and provides evidence of potential structural breaks in the comovement between energy and agricultural commodity prices, assesses the relative importance of each of the three price transmission channels in integrating energy and agricultural commodity markets, and estimates the potential contribution of important US biofuels regulations to this integration. By following a statistical approach that was recently developed, this study, first of all, demonstrates that agricultural commodities that can also be used as biofuel feedstocks exhibit structural breaks in their comovement with crude oil at the end of the Summer 2004. Using a Difference-in-Differences approach, the study at hand then decomposes the contribution of the different price transmission channels to the comovement variations during the 2005-2014 period. It provides evidence for the contribution of all three channels to a massive comovement increase after January 2005, and shows that the substitution channel subsequently contributed to a comovement decrease at the beginning of 2010. Overall, this study concludes that the jump in comovement between US energy and agricultural commodity prices that occurred between 2005 and 2010, and ultimately contributed to the severe food crisis, was caused by both extreme high crude oil prices and US regulations promoting biofuels. In this respect, this study id.