International Journal of Trade, Economics and Finance, Vol. 4, No. 5, October 2013
Sugar Commodity Price Analysis: Examining Sugar Producer Countries
Kumara Jati
The first step was to collect data from the biggest sugar Abstract—This study examined the dynamic relationship producer country in the world which is Brazil, then data from between Brazilian Sugar Price, Indian Sugar Price, French India as the second biggest sugar producer country, and then Sugar Price, Indonesian Sugar Price, exchange rate Brazilian collecting representation of third biggest sugar producer in real/US$, exchange rate US$/Euro, Oil Price, Gold Price, and LIBOR; and to detect if there is any difference between European Union which is France. Last but not least, this exchange rate Brazilian real/US$, exchange rate US$/Euro, Oil study collected one of the biggest producer but also one of the Price, Gold Price, and LIBOR effecting sugar producer biggest sugar importer in the world, which is Indonesia. countries’ price. We employ Vector Error Correction Models There is an indication that the price of the sugar in leading methods for a time series of weekly data from February 2007 to sugar producer countries is depending on several factors. November 2012. The Impulse Response Function results varied between each variable, but in general can it be concluded that Researchers already wrote some fact and findings about the there are: negative response of Brazilian/Indian/French sugar relationship between sugar price (as a part of food price) and price from shock of exchange rate and gold price; and positive other commodities prices. Hanson, et al. [8] said that sugar is response of Indian/Indonesian sugar price from shock of one of the agricultural commodities that linked to oil price interest rate. The empirical results in variance decomposition because oil is one of the intermediate inputs in production. test provided evidence that variability of sugar price of producer countries is varied between each variable. In general, The rise of the oil price, limited supplies of fossil fuel and it can be concluded that each of the sugar prices in producer increased concerns about global warming have created a countries (Brazil, India and Indonesia) had the biggest growing demand for renewable energy sources [9]. Ethanol percentage to explain the variability of their own sugar price as one of the renewable energy is the substitute product of oil (above 96 percent). This indicates that Brazilian, Indian and that can be produced from sugar cane or sugar beet. So, if oil Indonesian government protect their sugar industry from macroeconomic shock through sugar price policy/program. price increase then the impact is sugar price can increase too. Moreover, according to Harri et al. [10], oil prices has an Index Terms—Sugar producer countries, impulse response indirect effect on agricultural price through exchange rates function, sugar price, variance decomposition, vector error (in this case sugar price). Oil price usually sell in US$; so correction models. changes in international oil price will have direct effect on
domestic currency like Brazilian real and Euro. The fluctuation (appreciation/depreciation) of domestic currency I. INTRODUCTION gives effect to agricultural trading market (like sugar Sugar is pure carbohydrate, an important nutrient which commodity market) and its prices. supplies energy to the body [1]. More than 130 countries Specific case about the relation between exchange rate and produce sugar [2]. Also, in the international market, sugar sugar price was analyzed by McConnell et al. [11]. He said takes important role in the world commodity trading market. that world sugar price are related to Brazilian production In sugar producer countries like Brazil, India, France and costs. The production costs of sugar cane in Brazil is the Indonesia, the problem of sugar price is a common concern. cheapest in the world and Brazil is the biggest sugar producer Because it relates to price policy to control inflation, sugar and exporter in the world and, that is why if there is price, an important income for the sugar producer countries, depreciation in Brazilian Real againts US$, the Brazilian and multiplier effect to other industries. sugar export will increase, then the world sugar price will Why sugar is really important commodity to discuss? The decrease, and vise versa. answer can be varied. It is because there are 31,800 buses in Other literature used in this study is about price France that run on fuel derived from sugar beet [3]. Sugar co-movement. According to Pindyck and Rotemberg [12] cane industry in Brazil employs 1.5 millions of people [4]. price co-movement is the prices of raw commodities that There are 45 millions sugarcane farmers [5] and 660 sugar mills in India [6]. Moreover there are 900 thousand sugar have a persistent tendency to move together. The cane farmers and 1.3 millions of people work in the sugar co-movement can be explained by the regular shock of industry in Indonesia [7]. inflation, shift in aggregate demand, interest rates and This research aims to analyze the sugar producer countries. exchange rates. Natanelov et al. [13] said that co-movement The sugar producer countries definition in this occasion is the is a dynamic concept and the connection between market leader in producing sugar beet or sugar cane in the commodities can be changed by policy and economic world. development. In this research we assume that there is co-movement between Brazilian sugar price, Indian sugar Manuscript received May 20, 2013; revised July 22, 2013. price, French sugar price and Indonesian sugar price. Kumara Jati is with Faculty of Business, Economics and Policy Studies, University of Brunei Darussalam (e-mail: [email protected]). Based on the literature review above, this paper attempts to
DOI: 10.7763/IJTEF.2013.V4.303 288 International Journal of Trade, Economics and Finance, Vol. 4, No. 5, October 2013
nn contribute to the literature by investigating the shock of DFSP DBSP t C0tt11 C 1 t 1 C 2 Brazilian Sugar Price (BSP), Indian Sugar Price (ISP), nn DISP DFSP DINSP (3) French sugar price (FSP), Indonesian Sugar Price (INSP), t1tt11 C 3 t 1 C 4 t 1 nn DEBUS DEUSE nominal exchange rate between Brazilian Real and US$ tt11C5 t 1 C 6 t 1 nn (EBUS), nominal exchange rate between US$ and Euro DOP DGP tt11C7 t 1 C 8 t 1 (EUSE), International Oil Price (OP), International Gold n DIR price (GP), and London Interbank Offered Rate /LIBOR (IR) t1 C91 t Ct nn on sugar producer countries price (Brazil, India, France, and DINSP DBSP t D0tt11 D 1 t 1 D 2 Indonesia). In that respect, this study bring new insights into nn DISP DFSP DINSP (4) the literature on the energy, exchange rate, interest rate, gold t1tt11 D 3 t 1 D 4 t 1 nn DEBUS DEUSE and food nexus. tt11D5 t 1 D 6 t 1 nn DOP DGP tt11D7 t 1 D 8 t 1 n DIR II. THE VECM t1 D91 t Dt
The Vector Error Correction Model (VECM) is restricted nn DEBUS DBSP Vector Autoregression (VAR) designed to be used with t E0tt11 E 1 t 1 E 2 nn DISP DFSP DINSP (5) non-stationary series that are known to be cointegrated. t1tt11 E 3 t 1 E 4 t 1 nn Vector Error Correction (VEC) has cointegration relation DEBUS DEUSE tt11E5 t 1 E 6 t 1 built into the specification so that it restricts the long-run nn DOP DGP tt11E7 t 1 E 8 t 1 behavior of the endogenous variables to converge to their n DIR cointegrating relationships while allowing for short-run t1 E91 t Et adjustment dynamics. The term of cointegration is known as nn DEUSE DBSP Error Correction term since the deviation from long-run t F0tt11 F 1 t 1 F 2 nn equilibrium is corrected gradually through a series of partial DISP DFSP DINSP (6) t1tt11 F 3 t 1 F 4 t 1 nn short-run adjustments. Based on Enders [14] and Hardiyanto DEBUS DEUSE tt11F5 t 1 F 6 t 1 [15], we modified the VECM steps: stationary test, chose the nn DOP DGP VECM model specification, chose the Vector Autoregression tt11F7 t 1 F 8 t 1 n DIR based on lag length criteria, do the VAR stabilization test, t1 F91 t Ft and innovation accounting. nn DOP DBSP t G0tt11 G 1 t 1 G 2 nn DISP DFSP DINSP (7) t1tt11 G 3 t 1 G 4 t 1 ATA III. D nn DEBUS DEUSE tt11G5 t 1 G 6 t 1 The VECM is estimated based on 300 weekly series from nn DOP DGP February 2007 until November 2012. The data covering tt11G7 t 1 G 8 t 1 n DIR Brazilian Sugar Price (BSP), Indian Sugar Price (ISP), t1 G91 t Gt French sugar price (FSP), Indonesian Sugar Price (INSP), nn nominal exchange rate between Brazilian real and US$ DGP DBSP t H0tt11 H 1 t 1 H 2 (EBUS), nominal exchange rate between US$ and Euro nn DISP DFSP DINSP (8) t1tt11 H 3 t 1 H 4 t 1 (EUSE), International Oil Price (OP), International Gold nn DEBUS DEUSE price (GP), and London Interbank Offered Rate /LIBOR (IR). tt11H5 t 1 H 6 t 1 nn DOP DGP VECM Model Specification: relation between Model tt11H7 t 1 H 8 t 1 n Specification: relation between (BSP), (ISP), (FSP), (INSP), DIR t1 H91 t Ht (EBUS), (EUSE), (OP), (GP), and (IR) in first difference. nn DIR DBSP nn t I0tt11 I 1 t 1 I 2 DBSP DBSP nn t A0tt11 A 1 t 1 A 2 DISP DFSP DINSP (9) t1tt11 I 3 t 1 I 4 t 1 nn DISP DFSP DINSP nn t1tt11 A 3 t 1 A 4 t 1 DEBUS DEUSE (1) tt11I5 t 1 I 6 t 1 nn nn DEBUS DEUSE DOP DGP tt11A5 t 1 A 6 t 1 tt11I7 t 1 I 8 t 1 nn n DOP DGP I91DIR t It tt11A7 t 1 A 8 t 1 t1 n DIR t1 A91 t At IV. EMPIRICAL RESULT nn DISP DBSP A. Stationarity Test Results of the Data t B0tt11 B 1 t 1 B 2 nn DISP DFSP DINSP Stationarity test must be done before running the VECM t1tt11 B 3 t 1 B 4 t 1 (2) nn estimation. Time series data can be called stationer if the DEBUS DEUSE tt11B5 t 1 B 6 t 1 value of mean, variance and autocovariance for each lag is nn DOP DGP constant with time [16]. To detect the stationarity of nine tt11B7 t 1 B 8 t 1 n variables, which are (BSP), (ISP), (FSP), (INSP), (EBUS), DIR t1 B91 t Bt (EUSE), (OP), (GP), and (IR) is using Augmented
289 International Journal of Trade, Economics and Finance, Vol. 4, No. 5, October 2013
Dickey-Fuller (ADF) test. ADF test conducted with the two of the biggest sugar exporter in the world has to see other degree level and at the first difference level for series of data. opponent price policy. If the sugar price in India increase then The result is all variables stationaire in first difference. the supply of Indian sugar will increase, this situation would make Indian sugar export increase. The increase of Indian B. Leg length Criteria sugar price will influence the increase of world sugar price. If Estimated VAR lag is very sensitive to the amount of data world sugar price increase, then Brazil as a market leader in that it used. It must be determined the optimal amount of lag. sugar exporting countries will increase supply of sugar. The Determination of the length of this lag used to determine the increase of Brazilian sugar output will have two effects: first duration of the effect of a variable period of variables in the the price of Brazilian sugar will decrease then second, the past and to the other endogenous variables. Lag length can be output of world sugar will increase. determined using several approaches, FPE (Final Prediction The shock of the change of French Sugar Price (DFSP) Error) and AIC (Akaike Information Criterion) give the same responded positively to the change of Brazilian Sugar Price suggestion to choose second lag. (DBSP) in general. Although in the 3rd week, negative C. VECM Estimation Result response by the change of Brazilian Sugar Price started to Based on the VECM estimation, result are not all emerge. In general, there is an indication that the French significant lag in every equations. For more details will be sugar price and Brazilian sugar price move together (there is described one by one. Significant variable affecting the co-movement in price). This condition has the same result change in the price of sugar in Indonesia is change in the with Pindyck and Rotemberg [12], in which they said the price of sugar two month before. Then significant variables prices of raw commodities (sugar price) has the tendency to affecting the change in the price of refined sugar in the world move at the same direction. is the change in price of world raw sugar one month before. Other reasons that could explain this situation is that After that the significant variables affecting the change in the France produces sugar beet, but Brazil produces sugar cane. price of raw sugar in the world is the change in the world raw Sugar beet has its own unique production technology and sugar one month before. market buyer. Sugar beet can only grow in sub-tropical climate, while sugar cane can only grow in tropical climate. So the different of raw material sugar commodity explained V. INNOVATION ACCOUNTING why the price can move together. The shock from the change of Indonesian Sugar Price In the innovation accounting, it will be explained in detail (DINSP) responded negatively to the change of Brazilian how far and how much is the influence of shock or Sugar Price (DBSP) in general. Like the change of Indian disturbance of variables formed in the equation. Innovation Sugar Price shock, the change of Indonesian Sugar Price accounting consists of two parts, namely the Impulse shock also gives negative effect to the change of Brazilian Response Function (IRF) and Variance Decomposition Sugar Price. If Indonesian sugar price increase then the (VDCs). supply of Indonesian sugar would increase. But the problem A. Analysis of Impulse Response Function (IRF) is, productivity of Indonesian sugar industry not as big as 1) Analysis of IRF for Brazilian Sugar Price (see Fig. 1) other country such as Brazil, India and France. So the government policy to fix this condition is to import sugar
from other countries. If the demand of sugar in world Response to Cholesky One S.D. Innovations
Response of DBSP to DISP Response of DBSP to DFSP Response of DBSP to DINSP increased (because the increase of demand of sugar in 2 6 2 Indonesia), then the sugar production in Brazil would 4 1 1 increase. If production of sugar in Brazil increased, then 2 0 0 sugar price in Brazil would decrease. 0
-1 -1 -2 The shock from the change of exchange rate Brazilian
-2 -4 -2 Real/US$ responded negatively to the change of Brazilian 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12
Response of DBSP to DEBUS Response of DBSP to DEUSE Response of DBSP to DOP Sugar Price in general. This indicates that Brazilian exchange 2 2 2 rate depreciation (the nominal value increase) makes sugar 1 1 1 export (supply of Brazil sugar) increase. If the demand of 0 0 0 -1 sugar increased, then the price of Brazilian sugar would
-1 -1 -2 decrease [11].
-3 -2 -2 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 The shock from the change of exchange rate of Euro/US$
Response of DBSP to DGP Response of DBSP to DIR responded negatively to the change of Brazilian Sugar Price 2 2
1 in general. This is indicates that Euro becomes one of the 1 0 most important exchange rates besides US$, especially -1 0 because world refined/white sugar was traded in LIFFE -2 -1 -3 (London International Financial Futures and Options
-4 -2 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 Exchange). So if the exchange rate of Euro/US$ depreciated
Fig. 1. Impulse response function brazilian sugar price (DBSP). then the sugar producer countries that use Euro like France, the sugar competitiveness would increase. If this happened, The existence of shock from the change of Indian Sugar then French sugar export could increase because the price of Price (DISP) responded negatively by the change of Brazilian French sugar is more competitive than other countries. After Sugar Price (DBSP) in all period of time. Brazil and India as that, the world sugar supply would increased. Then the world
290 International Journal of Trade, Economics and Finance, Vol. 4, No. 5, October 2013 sugar price could decreased. In the end, there is also indirect sugar type (sugar cane) so in other period, the shock of the effect on decreasing of Brazilian sugar price. change in French sugar price responded negatively by Indian The shock from the change of oil price responded sugar price. positively to the change of Brazilian sugar price in some Response to Cholesky One S.D. Innovations Response of DISP to DBSP Response of DISP to DFSP Response of DISP to DINSP periods (1st and 2nd periods; 4th and 5th periods; 7th and 8th 8 8 12 8 4 4
4 periods). This indicates that oil price has positive effect to 0 0 0
-4 -4 Brazilian sugar price through production cost channel. If the -4
-8 -8 -8 price of oil increased, then the price of Brazilian sugar price 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12
Response of DISP to DEBUS Response of DISP to DEUSE Response of DISP to DOP would increase in certain periods of time. In the other hand, 8 8 8 the shock from the change of oil price responded negatively 4 4 4 0 rd th 0 0 to the change of Brazilian sugar price in some periods (3 , 6 -4 -4 -4 th -8 -8 -8 and 9 periods). This indicates that oil price has indirect 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 effect to Brazilian sugar price through ethanol as renewable Response of DISP to DGP Response of DISP to DIR 8 8 energy form by sugar cane. When the oil price increased, then 4 4
0 the ethanol price would also increase. This situation makes 0 -4 -4 sugar price as a raw material of ethanol will increase in early -8 -8 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 period of time, but after that when the supply of sugar Fig. 2. Impulse response function indian sugar price (DISP). increase, then the sugar price (Brazilian sugar price) will decrease again. Then the existence of shock from the change of Indonesian The shock from the change of gold price responded Sugar Price (DINSP) responded positively to the change of negatively to the change of Brazilian sugar price in general. Indian Sugar Price (DISP) in general. Like the change of This indicates that there is an indirect effect between gold Brazilian Sugar Price shock, the change of Indonesian Sugar price and Brazilian sugar price through commodity market Price shock also gives positive effect to the change of Indian channel. Both of these commodities were sold in commodity Sugar Price. If Indonesian sugar price increased, then the market. So there is tendency to trade-off between gold and supply of Indonesian sugar would increase. But the problem sugar commodity prices. The same result was found by is productivity of Indonesian sugar industry not as big as Avalos [17] in commodity corn and gold. other country such as India. So the government policy to Last but not least, the shock from the change of interest fulfill this condition is import sugar from other countries. If rate responded negatively to the change of Brazilian sugar the demand of sugar in the world increased (because the price in general. This result is difficult to explain, because increase of demand of sugar in Indonesia), then sugar price in usually if the interest rate increased, then the price of India would increase because India is one of the sugar commodity market (for example sugar) would increase too exporter country to Indonesia. nd th (this condition occur in 2 and 4 period). The situation can After that, the shock from the change of exchange rate of be explained through demand channel, if the interest rate Brazilian Real/US$ responded negatively to the change of increased, then the price would increase too. After the price Indian Sugar Price in general. This is an indication that increase, then the demand can adjust (decrease) because Brazilian exchange rate depreciation (the nominal value consumer behavior tend to take form in reduce spending increase) makes sugar export (supply of Brazil sugar) when the price increase. This condition makes the shock of increase. If the demand of sugar increases, then the price of interest rate inconclusive, because it can be positive at times, Brazilian sugar would decrease [11]. After that, because of but also negative in different situations. the co-movement between sugar price in Brazil and sugar 2) Analysis of IRF for Indian Sugar Price (see Fig. 2) price in India, so in the end, if price of sugar in Brazil The existence of shock from the change of Brazilian Sugar increased, then the price of sugar in India would also Price (DBSP) responded positively to the change of Indian increase. Sugar Price (DISP) in general. Brazil as one of the biggest Moreover, the shock from the change of exchange rate of sugar exporter and producer in the world can give indirect Euro/US$ responded negatively to the change of Indian Sugar Price. This is an indication that Euro becomes one of price effect to Indian sugar price. If the sugar price in Brazil the most important exchange rates besides US$, especially increased, then the world sugar price would increase, this because world refined/white sugar was traded in LIFFE situation would make Indian sugar price increase. There is (London International Financial Futures and Options indication of co-movement in price between Brazilian and Exchange). So if the exchange rate of Euro/US$ depreciated, Indian sugar price. This condition has the same result with then the sugar producer countries that usually use Euro Pindyck and Rotemberg [12]. exchange rate like France, the sugar competitiveness would The shock of the change of French Sugar Price (DFSP) increase. If this condition happened, then French sugar export responded positively to the change of Indian Sugar Price could increase because the price of French sugar is more nd th th th (DISP) in 2 , 5 , 6 , and 9 period. In the other hand, the competitive than other countries. After that, the world sugar change of French sugar price shock responded negatively to supply will be increase. Then the world sugar price can be the change of Indian Sugar Price in 3rd, 5th, 6th, 10th, and 11th decrease. In the end, there is also an indirect effect on period. There is an indication that the French sugar price in decreasing of Indian sugar price. certain period gives positive shock because of indirect price The shock from the change of oil price responded channel, but because of the different type of sugar that positively to the change of Indian sugar price in general. This produced by the France (sugar beet) compare to the Indian is an indication that oil price has positive effect to Indian
291 International Journal of Trade, Economics and Finance, Vol. 4, No. 5, October 2013 sugar price through production cost channel. If the price of oil the shock of the change in French sugar price responded increased, than the price of Indian sugar price would increase. negatively by Indian sugar price. Then the shock from the change of gold price responded Then the shock of the change of Indonesian Sugar Price negatively by the change of Indian sugar price. This indicates (DINSP) responded positively to the change of French Sugar that there is indirect effect between gold price and Brazilian Price (DFSP) in general. There is an indication the sugar price through commodity market channel. Both of Indonesian sugar price in certain period give positive shock these commodities were sold in commodity market. So there to the French sugar price because of sugar demand channel. is a tendency to trade-off between gold and sugar commodity Indonesia as one of the biggest sugar importer in the world prices. The same result where found by Avalos [17] in corn with 240 million people and around 5.2 million ton sugar and gold. consume every year has its own “demand pull” to other sugar The shock from the change of interest rate responded producer and exporter countries like France. Indonesia and positively to the change of Indian sugar price in general. The France also the member of International Sugar Association explanation of this condition is there is an indication that (ISA), where there is price information that shared between interest rate has indirect effect to Indian sugar price through the members. production cost channel. If interest rate is increased, then the The shock from the change of exchange rate of Brazilian cost of sugar production in India would increase. Finally, the Real/US$ responded negatively to the change of French Indian sugar price will increase also. This result is different Sugar Price. This is an indication that Brazilian exchange rate when we compare to shock from the change of interest rate depreciation (the nominal value increase) makes sugar export responded that negatively by the change of Brazilian sugar (supply of Brazil sugar) increase. If the supply of sugar price. increases, then the price of sugar in Brazil would decrease. 3) Analysis of IRF for French Sugar Price (see Fig. 3) After that, because of the co-movement between sugar price in Brazil and sugar price in France, so in the end, if price of
Response to Cholesky One S.D. Innovations sugar in Brazil decreased then the price of sugar in France
Response of DFSP to DBSP Response of DFSP to DISP Response of DFSP to DINSP 2 2 would decrease also.
20 1 1 Moreover, the shock from the change of exchange rate of 15 0
-1 0 10 Euro/US$ responded negatively to the change of French -2 5 -1 -3 0 Sugar Price. If the exchange rate of Euro/US$ depreciates -4 -2 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 (the nominal value increase) then sugar competitiveness of Response of DFSP to DEBUS Response of DFSP to DEUSE Response of DFSP to DOP 2 2 2 sugar producer countries that usually use Euro exchange rate 1 1 1 0 (like France) will increase. The competitiveness of French -1 0 0
-2 -1 -1 sugar price increase because the depreciation of Euro makes -3 -4 -2 -2 French sugar price is cheaper compare to world sugar price. 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12
Response of DFSP to DGP Response of DFSP to DIR So, there is an indication of negative indirect effect from the 2 2
1 1 change of exchange rate of Euro/US$ to French sugar price.
0 0 The shock from the change of oil price responded -1 -1 positively by the change to French sugar price in some -2 -2 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 periods (2nd, 4th, 5th, and 8th periods). This is an indication that Fig. 3. Impulse response function french sugar price (DFSP). oil price has a positive effect to French sugar price through
The existence of shock from the change of Brazilian Sugar production cost channel. If the price of oil increase than the Price (DBSP) responded positively to the change of French price of French sugar price would increase in certain periods Sugar Price (DFSP) in general. Brazil as one of the biggest of time. In the other hand, the shock from the change of oil sugar exporter and sugar producer in the world can give price responded negatively to the change of French sugar rd th th th th th indirect price effects to the French sugar price. The same price in some periods (3 , 6 , 9 , 10 , 11 , and 12 periods). thing happened where Brazilian Sugar Price is also has This indicates that oil price has an indirect effect to the indirect effect to Indian sugar price also. If the sugar price in French sugar price through ethanol as renewable energy form Brazil increased, then the world sugar price would increase, by sugar beet. When the oil price increased, then the ethanol this situation would make French sugar price increase. There price would increase also. This situation would make sugar is an indication of co-movement in price between Brazilian price as a raw material of ethanol increase in early period of and French sugar price. time, but after that when the supply of sugar increased, then Then the shock of the change of Indian Sugar Price (DISP) the sugar price (French sugar price) would decrease again. responded positively to the change of French Sugar Price The shock from the change of gold price responded (DFSP) in 2nd, 5th, 6th, and 9th period. In the other hand, the negatively to the change of French sugar price. This indicates change of French sugar price shock responded negatively to that there is an indirect effect between gold price and French the change of Indian Sugar Price in 1st, 3rd, 6th, and 7th period. sugar price through commodity market channel. Both of There is an indication that the change of Indian sugar price in these commodities were sold in commodity market. So there certain period gives positive shock to the change of French is a tendency to trade-off between gold and sugar commodity sugar price because of indirect price channel. On the other prices. The same result was found in the relation between hand, the change of Indian sugar price responded negatively Brazilian and Indian sugar prices with gold price. to the change of French sugar price indicates that the different Finally, the shock from the change of interest rate type of sugar that produced by the France (sugar beet) responded positively to the change of French sugar price in compare to Indian sugar type (sugar cane) so in other period 2nd, 5th, 9th and 12th periods. In the other hand, the change of
292 International Journal of Trade, Economics and Finance, Vol. 4, No. 5, October 2013 interest rate responded negatively to the change of French The shock from the change of exchange rate of Brazilian sugar price in 3rd, 7th, and 10th periods. There is an indication Real/US$ responded positively to the change of Indonesian that the change of interest rate gives positive shocks to the Sugar Price. This condition is hard to explain because usually change of French sugar price because of production cost the shock of the change of Brazilian Real/US$ responded channel. If interest rate is increased, then the production cost negatively to Brazilian, France and Indian sugar price. But of French sugar would increase. In the end, French sugar this is one of the indication that Indonesia as one of the price would increase also. The negative shock of interest rate biggest sugar importer country has its own characteristics from the change of interest rate to the change of French sugar responding the shock of the change of exchange rate price was happened because of demand channel (the same Brazilian Real/US$. Indonesian sugar policy protecting their result with interest rate shock to Brazilian sugar price). sugar markets makes Indonesian sugar price has different response compared to Brazilian, France and Indian sugar 4) Analysis of IRF for Indonesian Sugar Price (see Fig. 4) price. The existence of shock from the change of Brazilian Sugar Other interesting find is the shock from the change of oil Price (DBSP) responded positively to the change of price responded negatively to the change of Indonesian sugar Indonesian Sugar Price (DINSP) in general. Brazil as one of price in general. The result is difficult to answer because the biggest sugar exporter and producer in the world could usually oil price has positive effect to sugar price in Brazil, give an indirect price effect to the Indonesian sugar price like Indian and France. The condition in Indonesia is different it give an indirect effect to Indian and French sugar price also. because the government subsidized the retail petrol price If the sugar price in Brazil increased, then the world sugar with fix price Rp.4,500/litre (July 2013 increase become price would increase. This situation would make Indonesian Rp.6,500/litre) compare to international petrol price around sugar price increase. There is an indication of co-movement Rp.9,500/litre. So if the International oil price increased, in price between Brazilian and Indonesian sugar price. although Indonesia is one of the biggest oil importing Then the shock of the change of Indian Sugar Price (DISP) country, but the effect to Indonesian sugar price is not responded positively to the change of Indonesian Sugar Price positive. (DINSP). There is an indication that the change of Indian Then the shock from the change of gold price responded sugar price gives positive shock to the change of Indonesian negatively to the change of Indonesian sugar price. This sugar price because of an indirect price channel. indicates that there is an indirect effect between gold price and Indonesian sugar price through commodity market Response to Cholesky One S.D. Innovations channel. Both of these commodities were sold in commodity Response of DINSP to DBSP Response of DINSP to DISP Response of DINSP to DFSP 10 10 10 market. So there is a tendency to trade-off between gold and 5 5 5 sugar commodity prices. The same result where found in the 0 0 0 relation between Brazilian, Indian and French sugar prices -5 -5 -5 with gold price. -10 -10 -10 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 Finally, the shock from the change of interest rate Response of DINSP to DEBUS Response of DINSP to DEUSE Response of DINSP to DOP 10 10 10 responded positively to the change of Indonesian sugar price 5 5 5 in general. There is an indication that the change of interest 0 0 0 rate gives positive shocks to the change of Indonesian sugar -5 -5 -5
-10 -10 -10 price because of production cost channel. If interest rate is 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12
Response of DINSP to DGP Response of DINSP to DIR increased, then the production cost of Indonesian sugar 10 10 would increase. In the end, Indonesian sugar price would 5 5
0 0 increase also. -5 -5 B. Variance Decomposition (VDCs) -10 -10 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 Fig. 4. Impulse Response Function Indonesian Sugar Price (DINSP). VDCs is used in order to construct forecast error variance a variable, how large the differences between variants before After that, the shock of the change of French Sugar Price and after the shock occurs, either from shock and the other (DFSP) responded positively to the change of Indonesian variables derived from the variable itself, the way is to Sugar Price (DINSP) in 2nd, 5th, and 9th periods. In the other measure the percentage of shock of each variable. hand, the shock of the change of French sugar price Base on the Table I, can be concluded that Brazilian sugar responded negatively to the change of Indonesian sugar price price has the biggest percentage to explain the variability of in 3th, 7th, 10th and 11th periods. There is an indication that the Brazilian sugar price (96.34 percent). Indian sugar price also French sugar price in certain period gives positive shock to the biggest percentage to explain the variability of Indian Indonesian sugar price because of sugar co-movement in sugar price (96.29 percent). Then Indonesian sugar price also commodity price. Indonesia and France also the member of the biggest percentage to explain the variability of Indonesian International Sugar Association, where there is price sugar price (98.56 percent). These three results indicate that information that shared between the members. The shock of there are other factors besides other countries sugar price, the change of French sugar price responded negatively to the exchange rate, oil price, gold price and exchange rate that can change of Indonesian sugar price indicates that in some explain more about the variability of Brazilian, Indian and periods of time there is also demand channel that affect to Indonesian sugar prices. Another important finding is that price. When the price is increased, in some level the demand Brazilian, Indian and Indonesian government indicates to tend to decrease. If demand of sugar is decreased, then protect their sugar industry from macroeconomic shock Indonesian sugar price would decrease also. through sugar price policy/program. Brazilian government
293 International Journal of Trade, Economics and Finance, Vol. 4, No. 5, October 2013 give sugar price subsidy, price that taken by sugar producer is That is one of the explanations why the variability of French higher than international price (domestic sugar price higher sugar price can be explained by the French sugar price only than export sugar price). On the other hand, Indian and 8.34 percent. One of the reasons that Brazilian sugar price Indonesian government decided domestic sugar floor price can explained the variability of French sugar price about on sugar mills for basis of sugar cane price in farmer. On the 89.56 percent is Brazil the market leader of sugar producer contrary, France as a member of European Union, still on and exporter country. going to liberalize the protected European sugar market [18].
TABLE I: FORECAST ERROR VARIANCE DECOMPOSITION AFTER 12 PERIODS (WEEKS) DBSP DISP DFSP DINSP DEBUS DEUSE DOP DGP DIR DBSP 96.34 0.17 1.80 0.14 0.30 0.26 0.13 0.81 0.03 DISP 0.44 96.29 0.11 0.71 0.05 0.70 0.49 1.02 0.14 DFSP 89.56 0.34 8.34 0.06 0.67 0.33 0.17 0.46 0.02
DINSP 0.23 0.29 0.14 98.56 0.11 0.02 0.23 0.36 0.02
shock from Brazilian sugar price, Indian sugar price, VI. CONCLUSION exchange rate Brazil Real/US$, exchange rate US$/Euro, and This study is probably the first attempt to examine the interest rate responded positively by Indonesian sugar price. dynamic relationship between Brazilian Sugar Price, Indian This indicates that Brazilian and Indian sugar price give Sugar Price, French Sugar Price, Indonesian sugar price, positive effect to Indonesian sugar price through indirect nominal exchange rate between Brazilian Real and US$, price channel. Then the interest rate shock give positive nominal exchange rate between US$ and Euro, International effect to Indonesian sugar price through production cost channel. After that, the shock from oil price and gold price Oil Price, International Gold price, and London Interbank responded negatively to Indonesian sugar price. The other Offered Rate /LIBOR in a Vector Error Correction Models interesting thing is shock from oil price do not give positive analysis setting. We employed innovation accounting with effect to Indonesian sugar price because the Indonesian Impulse Response Function (IRF) and Variance government subsidized the retail petrol price. Decomposition (VDCs) calculation on weekly variable data The empirical results of VDCs analysis in general ranging from February 2007 to November 2012 to explained that each of the sugar prices in producer countries understand how the sugar price in producer countries (Brazil, India and Indonesia) has the biggest percentage to responded if there was a shock from macroeconomics explain the variability of their own sugar price (above 96 variables and to know the composition of other variables that percent). This indicates that Brazilian, Indian and Indonesian could explain the variability of sugar price in producer government protect their sugar industry from macroeconomic countries. shock through sugar price policy/program. The interesting The empirical results of IRF analysis in general provided part is the variability of French sugar price can be explained strong evidence of the shock from Indian sugar price, to the French sugar price only just 8.34 percent. This Indonesian sugar price, exchange rate Brazil Real/US$, indicates that France as a member of European Union still on exchange rate US$/Euro and gold price responded negatively going to liberalize the protected sugar market. by Brazilian Sugar Price. This indicates that macroeconomic shocks have negative effect to Brazilian sugar price through REFERENCES demand side. Also the shock from exchange rate Brazil Real/US$, exchange rate US$/Euro and gold price responded [1] The louisiana Sugar Industry, American Sugar Cane League (ASCL), USA, 2010. negatively to Indian Sugar Price. The interesting part is that [2] J. Nyberg, “Sugar international market profile,” Markets and Trade the shock from Brazilian sugar price, Indonesian sugar price, Division Food and Agriculture Organization of the United Nations, Oil Price and Interest Rate responded positively to Indian 2006. [3] The European Sugar Sector: A Long-Term Competitive Future, sugar price. This indicates that there is co-movement between European Commission (EC), 2006. Brazilian sugar price, Indonesian sugar price and Indian [4] K. G. Balcombe and G. Rapsomanikis, “Bayesian estimation of sugar price [12]. This finding is similar with research by non-liniear vector error correction models: the case of the sugar-ethanol-oil nexus in Brazil,” Paper Commodities and Trade Lescaroux [19] but the co-movement happened only in the Division of Food and Agricultural Organization, United States, 2006. short run. Moreover the oil price and interest rate has positive [5] S. R. S. Murthy, “Economics of sugarcane production and processing,” effect to Indian sugar price through production cost channel. Department of Economic Analysis and Research, National Bank of Then the shock from Brazilian sugar price and Indonesian Agriculture and Rural Development, Mumbai, India, 2010. [6] S. Solomon, “The Indian sugar industry: an overview,” Society of sugar price responded positively to French sugar price. This Sugar Research & Promotion Sugar Tech, vol. 13, no. 4, pp. 255-265, also indicates that sugar prices in sugar cane producer 2011. countries tend to move in the same direction. After that the [7] W. R. Susila and B. M. Sinaga, “Analisis kebijakan industri gula Indonesia,” JAE, vol. 23, no. 1, Mei, 2005. shock from exchange rate Brazil Real/US$, exchange rate [8] K. Hanson, S. Robinson, and G. Schluter, “Sectoral effects of a world US$/Euro and gold price responded negatively to French oil price shock: economy wide linkages to the agricultural sector,” Sugar Price. This indicates that there is trade-off between Journal of Agricultural and Resource Economics, vol. 18, no. 1, pp. 96-116, 1993. gold commodity market, money market and sugar [9] S. Srinivasan, “The food v. fuel debate: a nuanced view of incentives commodity market. The last result of ADF, in general the structures,” Renewable Energy, vol. 34, pp. 950-954, 2009.
294 International Journal of Trade, Economics and Finance, Vol. 4, No. 5, October 2013
[10] A. Harri, L. Nalley, and D. Hudson, “The relationship between oil, [17] F. Avalos, “Do oil prices drive food prices? A natural experiment,” exchange rates, and commodity prices,” Journal of Agricultural and presented at the Sixth International Conference on Economic Studies, Applied Economics, vol. 41, no. 2, pp. 501-510, 2009. Fondo Latinomericano de Reservas, Cartagena, 22 July, 2011. [11] M. McConnell et al., “World sugar price volatility intensified by [18] R. Gibb, “The european union‟s „everything but arms‟ development market and policy factors,” Amber Waves, Economic Research Service initiative and sugar: Preferential access or continued protectionism?” USDA, vol. 8, issue 3, September 2010. Applied Geography, vol. 26, pp. 1-17, 2006. [12] R. S. Pindyck and J. J. Rotemberg, “The excess co-movement of [19] F. Lescaroux, “On the excess co-movement of commodity prices- a commodity prices,” The Economic Journal, vol. 100, no. 403, pp. note about the role of fundamental factors in short-run dynamics,” 1173-1189, 1987. Energy Policy, vol. 37, pp. 3906-3913, 2009. [13] V. Natanelov et al., “Is there co-movement of agricultural commodities futures prices and crude oil?” Energy Policy, vol. 39, pp. 4971-4984, 2011. Kumara Jati was born in Jakarta, May 22, 1982. He is in [14] W. Enders, Applied Econometric Time Series, John Wiley & Son, New Faculty of Business, Economics and Policy Studies York, 1995. majoring development economics in University of [15] A. V. Hardiyanto, „The efficient market hypothesis puzzle for Brunei Darussalam. He His master (master of science IDR/USD: challenges for Prediction,” Paper Seminar ISEI I, Jakarta, economics) taken from Faculty of Economics University Indonesia, 2004. of Indonesia. He is working as a junior researcher in [16] D. N. Gujarati, Basic Econometric: Fourth Edition International Ministry of Trade, Republic of Indonesia. Edition, McGraw-Hell Higher Education, Singapore, 2003.
295