Exogenous oil supply shocks and global agricultural commodity prices: The role of biofuels

Abstract

Using quarterly data ranging from 1986Q1 to 2019Q4, this paper identifies an oil supply shock that is exogenous to global real economic activity in the impact quarter based on the proxy structural vector autoregressions (SVAR). Then, the impact of this shock on global agricultural commodity prices is examined, with a particular focus on the role of biofuels in distributing the impact of this shock on global food commodity prices. We find that unfavorable exogenous oil supply shocks have a significant positive effect on global agricultural commodity prices. Moreover, the significant positive effect of the unfavorable exogenous oil supply shock on global agricultural commodity prices is primarily attributable to the impact of the shock on the prices of oils, meals and grains, which are all key biofuel feedstocks. We find evidence that unfavorable exogenous oil supply shocks affect global food commodity prices partly through the biofuel production channel. Finally, we uncover that exogenous oil supply shocks have played an important role in historical food commodity price movements, especially since the early 2000s. These findings are very useful for policymakers in understanding the relationship between oil supply shocks and global agricultural commodity price fluctuations.