Does Oil Price Drive World Food Prices? Evidence from Linear and Nonlinear ARDL Modeling

Abstract

The macroeconomic outcomes of oil price fluctuations have been at the forefront of the debate among economists, financial analysts and policymakers over the last decades. Among others, the oil price–food price nexus has particularly received a great deal of attention. While an abundant body of literature has focused on the linear relationship between oil price and food price, little is known regarding the nonlinear interactions between them. The aim of this paper is to conduct aggregated and disaggregated analyses of the impact of the Brent and West Texas Intermediate (WTI) oil prices on international food prices between January 1990 and October 2017. The empirical investigation is based on the estimation of linear and nonlinear autoregressive distributed lag (ARDL) models. The findings confirm the presence of asymmetries since the overall food price is only affected by positive shocks on oil price in the long-run. While the dairy price index reacts to both positive and negative changes of oil price, the impact of oil price increases is found to be greater. Finally, the asymmetry is present for some other agricultural commodity prices in the short-run, since they respond only to oil price decreases. All in all, the study concludes that studies assuming the presence of a symmetric impact of oil price on food price might be flawed. The findings are important for the undertaking of future studies and the design of international and national policies in the fight against food insecurity.

On the Analysis of Food and Oil Markets in Nigeria: What Prices Tell Us From Asymmetric and Partial Structural Change Modeling?

“…Previous studies established a statistical link between oil price and food price. The positive impact of oil price on food price was recorded empirically by Nazlioglu and Soytas (2012), Pieters and Swinnen (2016), and Zmami and Ben-Salha (2019), amongst others. Conversely, empirical evidence on the negative relationship between oil price and food price was reported by Kargbo (2005) and Davidson et al (2012).…”

“…A significant number of empirical studies emphasized the symmetric (linear) relationship between oil and agricultural commodity markets. Nevertheless, others modeled oil price asymmetries and its potential impact on food prices (Ibrahim 2015;Abdl-Aziz et al, 2016;Coronado et al, 2018;Paris 2018;Zmami and Ben-Salha 2019). However, most of these studies failed to account for structural changes (breakpoints) in the series for oil and food prices which consequently left some questions unanswered.…”

“…However, most of these studies failed to account for structural changes (breakpoints) in the series for oil and food prices which consequently left some questions unanswered. Abdl-Aziz et al (2016) and Zmami and Ben-Salha (2019) utilized an asymmetric approach to ascertain the impact of oil price on food price. However, their specifications fell short of some key macroeconomic factors that are critical to food price fluctuations (such as extreme weather events, supply shocks, production index, food policy).…”

Islamic finance and food commodity trading: is there a chance to hedge against price volatility and enhance food security?

“…Current researchers of commodity markets outline various factors directly or indirectly influencing the real asset prices. Among them are international trade and factors related to trade distortion (export bans, tariffs, and other barriers; Rutten et al, 2013;Smith and Glauber, 2020), currency volatility (Buberkoku, 2017), oil prices (Taghizadeh-Hesary et al, 2019;Zmami and Ben Salha, 2019), and speculators' activities, including heavy investment in futures, which result in grain market financialization (Seddon, 2019;Aït-Youcef, 2019). Other factors of the food commodity market dichotomy are the mismatch between exchange storage and commercial storage rates (Garcia et al, 2015;van Huellen, 2018).…”

Analysis of Agricultural Commodities Prices with New Bayesian Model Combination Schemes

“…Third, this method is based on recursive computations, which resembles the real-market conditions, when forecasting can be done only on the basis on the past information; but in the next period the model can (and should) be updated (re-estimated), because new (more) information is available. For example, the mentioned impact of crude oil price on agricultural commodities can be asymmetric, i.e., positive and negative oil price shocks can differently influence agricultural commodities prices [22], which suggests that econometric model with time-varying regression coefficients might be desirable.…”