Dynamics and evolution of the role of biofuels in global commodity and financial markets

Abstract

Biofuels form part of a complex system comprising their production factors (usually agricultural commodities) and raw and retail fuels. Recently, it has been suggested that biofuels might affect or be affected by financial assets such as exchange rates, interest rates, stocks, and by other commodities. However, further extensive studies are required to investigate this. Here we present a combination of minimum spanning trees correlation filtration and wavelet analysis uncovering the ties in a wide portfolio of 33 commodities and relevant assets for biofuels between 2003 and 2016. We show that for Brazilian and US ethanol, their respective feedstocks lead biofuels prices, and not vice versa. This dynamic remains qualitatively unchanged when controlling for the influence of crude oil prices. In contrast, European biodiesel exhibits only moderate ties to its production factors. Other financial factors do not interact significantly with biofuel prices in general. Biofuel prices depend on related commodities—such as corn, sugar cane and palm oil—but their connection to other non-feedstock commodities is less well explored. Filip et al. analyse a data set of 33 commodities and assets and examine their relationships to biofuels in Brazil, the US and Europe.