Food prices – particularly prices of agricultural commodities used as a feedstock for biofuel production – have reached record highs in 2008. Within a period of slightly more than two years prices for staple food such as corn, soy, wheat, and vegetable oils have more than doubled. This price acceleration occurred at a time of surging crude oil prices and a rapid expansion of biofuel production, which relied nearly exclusively on feedstock from food crops. Consequently, the market development has triggered a controversial debate on the question whether the increase of agricultural prices in line with crude oil prices is a mere coincidence, due to stock market speculation, or result of a lasting integration of the agricultural and the energy sector. In the light of these uncertainties on an issue that could have a strong impact on global producers and consumers of food – particularly those in developing countries – the objective of this study is to analyse under which conditions agricultural commodity and crude oil markets could be linked in the future and in how far an integration of markets would affect developing countries.
The dissertation is divided into three parts: Part I analyses under which conditions prices in different commodities markets in general follow the same trend. Part II investigates whether a similar co-movement of prices is technically possible in food and crude oil markets, while Part III focuses on potential effects of such a co-movement of prices on developing countries.
Table of Contents
1. INTRODUCTION AND OBJECTIVE OF THE STUDY
1.1 Introduction to a controversial question: Does biofuel production link food to crude oil prices?
1.2 Objectives and approach of the study
PART I FRAMEWORK ON PRICE LINKS IN COMMODITY MARKETS
2. INTRODUCTION
2.1 The role of prices
2.2 Factors resulting in price distortions
3. METHODOLOGY OF PART I
3.1 Research questions
3.2 Selection of research studies included in the literature review
3.3 The concept of cointegration
4. PRICE LINKS BETWEEN SELECTED COMMODITY MARKETS – A LITERATURE REVIEW
4.1 Cointegration of natural gas and crude oil markets
4.2 Cointegration of natural and synthetic rubbers
4.3 Cointegration of cotton and polyester markets
4.4 Price links between competing crops
4.5 Linked commodity markets without cointegration
5. GENERAL FRAMEWORK OF PRICE LINKS BETWEEN DIFFERENT COMMODITY MARKETS
5.1 Factors driving cointegration
5.2 Factors limiting cointegration
5.3 Price setting mechanisms in cointegrated markets
PART II FACTORS LINKING THE CRUDE AND THE PLANT OIL MARKET
6. METHODOLOGY OF PART II
6.1 The approach
6.2 Illustration of the approach
6.3 Strength and limitations compared to other methodologies
7. THE STRUCTURE OF THE CRUDE AND THE PLANT OIL MARKET
7.1 Definition of the relevant markets
7.2 Size of the markets
8. SUBSTITUTION EFFECTS
8.1 Overview of all areas of substitution between crude and plant oil
8.2 Demand side substitution in the transport sector
8.3 Demand side substitution in heating and electricity
8.4 Demand side substitution in the chemical sector
8.5 Substitution effects on the supply side
9. CONCLUSION ON THE LINK BETWEEN CRUDE AND PLANT OIL PRICES
9.1 Effect of the structure of crude and plant oil markets on price setting mechanisms
9.2 Lower price boundaries of plant oil defined by crude oil prices
9.3 Factors limiting cointegration
9.4 Comparison with empirical data and the results of other studies
PART III THE EFFECTS OF A CO-MOVEMENT OF CRUDE OIL AND AGRICULTURAL COMMODITY PRICES
10. THE EFFECTS OF A LINK BETWEEN CRUDE OIL AND FOOD PRICES
10.1 Impact on Food Security
10.2 Other macroeconomic impacts
11. IMPACT ON INDUSTRIALIZED COUNTRIES
12. IMPACT ON BIOFUEL INDUSTRIES
13. IMPACT ON THE CRUDE OIL MARKET
14. POLICIES TO MITIGATE NEGATIVE EFFECTS ON FOOD SECURITY
14.1 Measures to reduce the lower price boundaries
14.2 Measures to reduce immediate negative impacts in developing countries
14.3 Case Studies: The impact of a link between crude oil and food markets on selected developing countries and policy responses
15. SUMMARY AND CONCLUSION
15.1 The link between plant and crude oil prices
15.2 The impact of a link between plant and crude oil prices and potential counter measures
15.3 Limitations of the results
15.4 Further research required
CALCULATIONS
i. Pure plant oil
ii. Biodiesel
iii. Heating oil
iv. Substitution on the supply side
Research Objectives and Themes
The primary objective of this dissertation is to analyze whether agricultural commodity and crude oil markets might become linked in the future and how such an integration would impact developing countries. The research aims to explore the theoretical frameworks of market cointegration and test if the substitution potential between plant oil and crude oil can lead to a long-term co-movement of prices, potentially threatening food security.
- Analysis of cointegration drivers and barriers in commodity markets.
- Estimation of substitution potential between plant oil and crude oil in various industry sectors.
- Assessment of the macroeconomic and food security impacts of linked oil and food prices on developing countries.
- Evaluation of policy responses to mitigate the negative impacts of such market integration.
- Examination of the role of government interventions, subsidies, and mandates in shaping market price links.
Excerpt from the Book
1.1 Introduction to a controversial question: Does biofuel production link food to crude oil prices?
Food prices – particularly prices of agricultural commodities used as a feedstock for biofuel production – reached record highs in 2008. Within a period of slightly more than two years prices for staple food such as corn, soy, wheat, and vegetable oils have more than doubled (International Monetary Fund (2008a), p. 1).
This price acceleration has occurred at a time of surging crude oil prices and a rapid expansion of biofuel production, which relies mainly on feedstock from food crops (UN Energy Department (2007), p. 31-35). Consequently, the market development has triggered a controversial debate on the question whether the increase of agricultural prices in line with crude oil prices is a mere coincidence, due to stock market speculation, or result of a lasting integration of the agricultural and the energy sector.
The debate has a strong impact on the global perception of biofuels. Once considered as a major chance for developing countries, biofuels were at the heart of policy agendas in 2005/2006. Studies and reports published by international institutions like the World Bank, the United Nations, or the EU Commission accentuate manifold advantages of the locally produced fuels. The main risk of biofuels highlighted in these studies is the need for ongoing subsidies to the industry. Environmental effects and negative impacts on food security are also mentioned, yet not the main focus in most of these reports (Kojima and Johnson (2005), p. 17ff; Dufey (2007), p. 1; Coelho (2005), p. 7ff; European Commission (2006a), p. 6-7; European Commission (2006b), p. 30-32; UN Energy Department (2007), p. 31-35).
Summary of Chapters
1. INTRODUCTION AND OBJECTIVE OF THE STUDY: Defines the research controversy regarding whether biofuel production links food and crude oil prices and sets the study's scope.
2. INTRODUCTION: Explains the informative and allocative roles of prices and identifies factors that lead to market price distortions.
3. METHODOLOGY OF PART I: Outlines the systematic literature review approach and defines the concept of cointegration for commodity markets.
4. PRICE LINKS BETWEEN SELECTED COMMODITY MARKETS – A LITERATURE REVIEW: Reviews existing literature on price cointegration between specific commodity pairs like oil/gas, rubber/elastomers, and cotton/polyester.
5. GENERAL FRAMEWORK OF PRICE LINKS BETWEEN DIFFERENT COMMODITY MARKETS: Develops a theoretical framework identifying drivers and barriers that link commodity market prices.
6. METHODOLOGY OF PART II: Details the two-step approach used to identify market segments for plant oil and calculate marginal rates of substitution.
7. THE STRUCTURE OF THE CRUDE AND THE PLANT OIL MARKET: Defines relevant markets for crude and plant oil and analyzes their relative sizes to understand potential price transmission.
8. SUBSTITUTION EFFECTS: Identifies various sectors (transport, energy, chemical) where plant oil substitutes for crude oil and analyzes the market potential and flexibility.
9. CONCLUSION ON THE LINK BETWEEN CRUDE AND PLANT OIL PRICES: Summarizes findings on the structural links and lower price boundaries between crude and plant oil markets.
10. THE EFFECTS OF A LINK BETWEEN CRUDE OIL AND FOOD PRICES: Assesses the impact of price co-movements on food security, accessibility, and macroeconomic stability in developing countries.
11. IMPACT ON INDUSTRIALIZED COUNTRIES: Evaluates the marginal effects of agricultural price fluctuations on industrialized nations compared to developing ones.
12. IMPACT ON BIOFUEL INDUSTRIES: Analyzes how fluctuating oil prices affect the competitiveness and break-even points of biofuel production.
13. IMPACT ON THE CRUDE OIL MARKET: Investigates how plant oil, as an unconventional resource, forms part of the oil supply curve and influences crude oil market dynamics.
14. POLICIES TO MITIGATE NEGATIVE EFFECTS ON FOOD SECURITY: Discusses various policy instruments for governments to protect food security, including subsidies, taxes, and trade restrictions.
15. SUMMARY AND CONCLUSION: Synthesizes the dissertation's main findings and suggests directions for future research.
Keywords
Biofuels, Crude Oil Prices, Agricultural Commodities, Food Security, Cointegration, Market Integration, Marginal Rate of Substitution, Developing Countries, Commodity Markets, Substitution Effects, Price Distortions, Feedstock, Renewable Energy, Trade Policy, Macroeconomic Impacts.
Frequently Asked Questions
What is the core subject of this dissertation?
The work primarily explores the potential link between agricultural commodity prices and crude oil prices, examining whether biofuel production leads to an integration of these two sectors.
What are the central themes discussed in the research?
Key themes include market cointegration, the substitution of crude oil with plant oil in industrial and energy applications, the impact on food security in developing nations, and policy measures to mitigate price volatility.
What is the primary objective or research question of this study?
The study aims to analyze whether plant oil and crude oil markets might become structurally linked in the future and how such an integration would affect producers and consumers of food in developing countries.
Which scientific methodology is utilized in this research?
The dissertation utilizes a two-part methodology: a systematic literature review to build a theoretical framework for cointegration, followed by an analysis of plant oil substitution potential using marginal rates of substitution and desk research.
What topics are covered in the main section?
The main sections cover the framework of price links in commodity markets, an analysis of substitution sectors for plant oil, and the macroeconomic effects of a co-movement between food and crude oil prices on both developing and industrialized nations.
Which keywords best characterize this work?
Biofuels, Crude Oil Prices, Agricultural Commodities, Food Security, Cointegration, Market Integration, Marginal Rate of Substitution, and Developing Countries.
How do biofuel mandates influence the link between crude and plant oil prices?
Mandates can reduce market flexibility. Since production plants required to meet these mandates continue to operate regardless of price fluctuations, they do not strengthen the direct market price link, effectively acting as an independent demand shifter.
Why is the "lower price boundary" concept significant?
The lower price boundary represents a threshold at which it becomes economically attractive for industries (like electricity generation) to switch from crude oil products to plant oil, thereby preventing plant oil prices from falling further in the long run.
What role does the electricity sector play as a potential market for plant oil?
The electricity sector is identified as the largest and most flexible market for plant oil substitution, as power plants can often switch between fuels without major technological modifications, thus exerting a significant influence on the price of plant oil.
- Citar trabajo
- Katharina Averdunk (Autor), 2010, Analysis of the Link between Crude Oil and Staple Food Prices and Its Implications on Developing Countries, Múnich, GRIN Verlag, https://www.grin.com/document/177215
