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The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

Energy represents an important share of production costs for many agricultural commodities. Previous studies have found mixed evidence of a pass‐through relationship between oil prices and agricultural commodity prices, a relationship that has the potential to disrupt farm‐level decision making. We propose that these mixed findings are in part due to heterogeneity in the pass‐through relationship across time horizons. We use a new wavelet‐based regression approach to explore horizon‐based heterogeneity in the relationship between oil and agricultural commodity prices. We find strong evidence of heterogeneity across time horizons and commodities. We develop a stylized model of agricultural production and show that agricultural contracts can generate price stickiness that leads to heterogeneity in input price pass through over different horizons. We also find evidence that recent technological shifts have led to a structural change in this horizon‐based heterogeneity.

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We develop a model of deforestation using a real option on agricultural land conversion and establish an important link between agricultural commodity price volatility and forest loss. Higher price volatility of staple commodities increases incentives to delay land conversion and is associated with lower levels of deforestation. Using satellite‐derived estimates of local deforestation and high‐frequency local maize prices across a panel of market catchments across 26 countries in sub‐Saharan Africa, we find strong empirical evidence that maize price volatility is negatively associated with forest loss. Our findings are driven by catchments in biomes that are relatively well‐suited to maize production. Instrumenting for changes in price levels and price volatility with spatially explicit temperature and rainfall anomalies yields results consistent with our main approach. The findings highlight important tensions between agricultural price stabilization policies, conservation efforts, and environmental externalities.