Georg-August-Universität Göttingen Department für Agrarökonomie und Rurale Entwicklung Volatile agricultural markets, how much is oil to blame? Dissertation to obtain the Ph. D. degree in the International Ph. D. Program for Agricultural Sciences in Goettingen (IPAG) at the Faculty of Agricultural Sciences, Georg-August-University Göttingen, Germany presented by Lucio Alberto Saucedo born in Santa Cruz de la Sierra, Bolivia Göttingen, March 2016 2 D7 1. Name of supervisor: Prof. Dr. Bernhard Brümmer 2. Name of co-supervisor: Prof. Dr. Olaf Korn Date of dissertation: May 12th, 2016 3 4 Contents List of Tables ................................................................................................................................. 7 List of Figures ................................................................................................................................ 9 Abbreviations .............................................................................................................................. 11 Acknowledgements ................................................................................................................... 13 1 Introduction ............................................................................................................... 15 2 Volatility in the after crisis period – A literature review of recent empirical research .......................................................................................................... 19 2.1 Introduction ..................................................................................................................... 19 2.2 Volatility concepts and measurement .................................................................... 20 2.2.1 Time Horizon .......................................................................................................................... 21 2.2.2 Considered Markets ............................................................................................................. 22 2.2.3 Ex-post measurement versus ex-ante prediction.................................................... 22 2.2.4 Estimation method ............................................................................................................... 23 2.3 Literature review on food price volatility ............................................................. 28 2.3.1 Introduction ............................................................................................................................ 28 2.3.2 Studies on price volatility .................................................................................................. 28 2.4 Assessment of drivers ................................................................................................... 44 2.4.1 Supply ........................................................................................................................................ 44 2.4.2 Demand ..................................................................................................................................... 46 2.4.3 Storage ....................................................................................................................................... 47 2.4.4 Macroeconomic factors ...................................................................................................... 48 2.4.5 Specific policies ...................................................................................................................... 50 2.4.6 Financialisation ..................................................................................................................... 52 2.4.7 Miscellaneous drivers of price volatility ..................................................................... 55 2.5 Conclusions ....................................................................................................................... 55 3 The dynamic pattern of volatility spillovers between oil and agricultural markets ...................................................................................................... 59 3.1 Introduction ..................................................................................................................... 59 3.2 Market development of biofuels ............................................................................... 60 3.2.1 Price co-movements between oil and biofuel feedstocks .................................... 63 5 3.3 Literature review ............................................................................................................ 66 3.4 Data and methodology .................................................................................................. 68 3.4.1 Data ............................................................................................................................................. 68 3.4.2 Methodology ........................................................................................................................... 69 3.5 Empirical findings .......................................................................................................... 72 3.6 Conclusions ....................................................................................................................... 76 3.7 Policy recommendations ............................................................................................. 77 Appendix ............................................................................................................................. 79 4 Volatile agricultural markets, the role of oil before and after the Great Recession ............................................................................................................................ 81 4.1 Introduction ..................................................................................................................... 81 4.2 Biofuels and the food-energy nexus ......................................................................... 83 4.3 Data ...................................................................................................................................... 85 4.3.1 Log price changes of energy and food markets ........................................................ 86 4.3.2 Development of market uncertainties in commodity markets .......................... 87 4.3.3 Unconditional second order moment interactions among commodities ...... 88 4.4 Methodology ..................................................................................................................... 89 4.4.1 Volatility spillover indices ................................................................................................. 93 4.5 Empirical findings .......................................................................................................... 96 4.5.1 Total spillovers ...................................................................................................................... 96 4.5.2 Directional spillovers .......................................................................................................... 98 4.5.3 Composite spillover indices and the contribution of oil .................................... 101 4.5.4 Integration between oil and agricultural markets ............................................... 105 4.6 Conclusions .................................................................................................................... 106 Appendix 1 ....................................................................................................................... 109 Appendix 2 ....................................................................................................................... 110 Appendix 3 ....................................................................................................................... 111 5 Discussion ................................................................................................................. 112 5.1 Volatility measures ..................................................................................................... 113 5.2 Impulse response analysis ....................................................................................... 114 5.3 The results...................................................................................................................... 118 References ........................................................................................................................ 121 6 List of Tables TABLE 1. DESCRIPTIVE STATISTICS OF THE VOLATILITY MEASURES SHOWN IN FIGURE 1 ........................................... 27 TABLE 2. ESTIMATES OF TOTAL SUPPORT FOR THE BIOFUEL INDUSTRY IN DEVELOPED COUNTRIES ......................... 61 TABLE 3. DESCRIPTIVE STATISTICS OF THE DATA ...............................................................................................................69 TABLE 4. VARIANCE DECOMPOSITION MATRIX, ETHANOL GROUP ...................................................................................72 TABLE 5. RELATIVE AVERAGE CONTRIBUTIONS TO THE SPILLOVER INDEX, ETHANOL GROUP ................................... 74 TABLE 6. RELATIVE AVERAGE CONTRIBUTIONS TO THE SPILLOVER INDEX, BIODIESEL GROUP .................................. 75 TABLE 7: VOLATILITY DRIVERS ..............................................................................................................................................79 TABLE 8. DESCRIPTIVE STATISTICS OF THE DATA ...............................................................................................................86