Energy and agricultural markets: price linkages and structural changes

Şaban Nazlıoğlu

Abstract


Recent dynamics (fluctuations and volatility) of global commodity prices have attracted an interest in examining what are the drivers and consequences of price booms and drops. The literature has focused on energy market linkages, financialization & speculation of the commodities, macro variables context and demand-supply equilibrium of the markets. This chapter is related to the literature on energy (oil) and agricultural commodity markets linkages and reviews the papers which have new perspectives and have documented fresh information to better understand the interrelations between energy and agricultural commodity markets. 

In order to better understand what drives agricultural prices, several factors are discussed. Based on the micro economic theory, it is clear that a price of a commodity is driven by demand- and supply-side conditions. Increasing interconnection between oil and energy markets has led to a huge and still growing empirical literature. Researches have focused on various kinds of research questions (co-integration, causality, volatility spillover e.t.c.). Even though it is unfortunately not possible to review all the papers, it is fortunately possible to draw a picture which mirrors the differences in research questions and modelling strategies.

This paper first presents a comprehensive review of the literature on oil and agricultural prices. Then it aims at investigating the direction of causality between oil and agricultural commodity prices within the context of a new causality approach proposed by Nazlioglu et al. (2016 and 2018) which augments the Toda-Yamamoto method with a Fourier approximation. This new approach is capable of capturing gradual or smooth shifts and does not require a prior knowledge regarding the number, dates, and form of structural breaks. The so-called Fourier Toda-Yamamoto causality test is applied to the major agricultural commodities. Traditional causality procedures that seek abrupt shifts are inadequate in capturing gradually developing structural changes.


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