Analysis of the Relationship between World Oil Price and Exchange Rate on Agricultural Commodity Prices in Indonesia

Abstract

Increasing food prices in the world caused a global food crisis. Some Asian countries are also affected by rising world food prices, including Indonesia. Using Vector Error Correction Model (VECM) method, the researchers intend to analyze the long-term relationship between world oil price and exchange rate to agricultural commodity price (rice, corn and soybean) in Indonesia and test whether there is an existing causality. This analysis is based upon the data set covering the monthly period of January 2010 to June 2017. The empirical results show that there is a long-term equilibrium relationship between world oil prices and exchange rate against three of agricultural commodity prices and there is only unindirectional causality of the world oil price against rice price. Nevertheless, this study confirms the hypothesis from world oil price to agricultural commodity price. While exchange rate did not show the pattern of causality relationship either one or two direction to each agricultural commodity price under study. According to Impulse Response Function (IRF), the study results show that the rice price negatively responds to shock of world oil prices in the short term while responding positively to shock of world oil prices in the long term. But response of corn and soybean prices is not significant. Meanwhile, shock of exchange rate is responded positively by rice and soybean prices. Conversely, shock of exchange rate on corn prices shows relatively weak and negative responses. To controlling surging prices of agricultural commodities (food), it is suggested that government policies directed at stabilizing food prices policies and exchange rate and also anticipate the exogenous impact of changes in world oil prices that could affect rice price.