Ethanol Prices and Agricultural Commodities: An Investigation of Their Relationship

Abstract

Brazil is an important player when it comes to biofuel and agricultural production. The knowledge of the price relationship between these markets has increasing importance. This paper adopts several tools, namely the Bai–Perron test of breakpoints, the Johansen cointegration test and the vector error correction model exploited by the orthogonal impulse response and the forecast error variance decomposition, for investigating the price transmission among the ethanol and the main Brazil’s agricultural commodities (sugar, cotton, arabica coffee, robusta coffee, live cattle, corn and soybean). The data series cover the period from January 2011 up to December 2018. The results suggest a stronger price transmission from the ethanol commodity to the agricultural commodities, rather than the opposite situation.

Quantifying the Predictability and Efficiency of the Cointegrated Ethanol and Agricultural Commodities Price Series

“…Such goods revealed price transmission (cointegration) in a previous study [19]. In fact, not only some agricultural commodities [9,28], but also relevant commodities for Brazil's economy, (e.g., the cotton, live cattle, corn, soybean, Arabica coffee, and Robusta coffee) have a direct linkage with the Brazilian ethanol.…”

“…The presence of breakpoints in the ethanol price series was identified using the Bai-Perron algorithm [41], and the period and sub-periods were classified as follows; Full-period (Jan/2011 to Dec/2018), Sub-period 1 (P 1 : Jan/2011 to May/2012), Sub-period 2 (P 2 : May/2012 to Nov/2013), Sub-period 3 (P 3 : Nov/2013 to Sept/2015), Sub-period 4 (P 4 : Sept/2015 to Oct/2017) and Sub-period 5 (P 5 : Oct/2017 to Dec/2018). Table 1 summarizes the cointegrations found by David et al [19]. Table 1.…”

“…David et al [19] investigated the cointegration and price transmission through a bivariate analysis between the ethanol (ETH) and seven important commodities in the Brazilian GDP. Those agricultural commodities consist of the sugar (SUG), cotton (COT), live cattle (LCA), Arabica coffee (ARA), Robusta coffee (ROB), corn (COR), and soybean (SOY).…”

“…However, the cash market leads to a long-run price discovery process. Other studies also pointed that the energy market is influenced by the agricultural commodities prices [9,[19][20][21][22][23][24][25][26][27][28][29][30].…”

Analysis of Structural Changes in Financial Datasets Using the Breakpoint Test and the Markov Switching Model

“…It was concluded that oil price shock does not induce much of the fluctuations in the ASEAN-5 economies. Another study [8] examined the price of ethanol and commodities in Brazil using the Bai-Perron test, the Johansen test, and the vector error correction model. The results showed that there was a short-term relationship between ethanol and commodities.…”