| The paper investigates the interaction between energy futures and
agriculture commodity futures prices, focusing on the recent upsurge of biofuels. The
correlation model of price returns between energy and agriculture is proposed here.
Empirical studies on the DJ-AIG (Dow Jones AIG) commodity indices document that the
increase of correlations between energy and grain price returns occurs during high
energy price periods, which supports the correlation model. By using petroleum as
energy, and soybean and soybean oil as biofuels, the paper observes that there is a sharp
rise in the correlations after 2004. In addition, the relationship between petroleum
and the three agricultural sources of bioethanolsugar, wheat, and cornhas
been examined here.
Biofuels, which are often considered as environment-friendly energy, have recently attracted
the attention of those who are interested in the use of fossil fuels and are concerned about
global climate change. In fact, the outgoing US President George W Bush proposed that 20% of
the energy in the US should be produced from renewable energy sources, including biofuels.
In addition, since the soaring demand for energy in the emerging countries may increase
even more, biofuels across the world may play an important role in the energy
supply-demand relationship. In order to sketch the influence of biofuels, Figure 1 illustrates the time series
of DJ-AIG (Dow Jones AIG) commodity indices for energy and soybean, the latter well known
as a biofuel. From Figure 1, it seems that since 2004, energy and soybean may move together
in recent days. This may be related to the recent increasing usage of biofuels. Accordingly,
an attempt has been made to examine the correlation between energy and agriculturals
for biofuels, in some detail.
There is ample literature on the analysis of energy and agricultural prices. Alexander
(1999) conducted empirical analyses for measuring energy price correlations not only between
spot and futures prices for energy, but also between spot prices between cross energy
commodities such as WTI (West Texas Intermediate) crude oil and natural gas. Eydeland and Wolyniec
(2003) discussed the correlation between different energy commodities used for energy
derivatives. On the other hand, as examples of price analysis on agricultural markets, Geman and
Nguyen (2005) suggested that price volatility and forward curves for soybean are affected by
the inventory. Dickie (2003) analyzed the volatility in agricultural prices. Richter and
Sorensen (2002) investigated soybean market by using the three-factor stochastic volatility
model. However, the interaction between energy and agriculture prices does not seem to have
been investigated. This paper, therefore, investigates the relationship between energy
and agricultural futures prices, shedding light on the recent upsurge of biofuels. |
