The Relationship between Fuel and Food Prices: Methods, Outcomes, and Lessons for Commodity Price Risk Management

We review the fuel-food price linkage models of the time series, structural, and general or partial equilibrium nature with the main attention devoted to the time series literature. Our assessment is nested in the discussion of general commodity prices co-movement on one side and in the prediction of most likely development of biofuel policies and production development on the other side. We pay particular attention to financial markets relevant features of commodity price co-movement significant for price risk management. We show that indeed the introduction of significant biofuels policies around 2005 increased the price transmission between fossil fuels and food commodities with intuitively expected prevailing leading role of fuel prices over food prices and with particular price linkages dynamically evolving in time and depending on the particular market under consideration. The econometric results show that due to the policy induced trade barriers, there is no evidence of sufficiently integrated international biofuels market with the US, European and Brazilian markets and policies following separate paths.