Price Transmission Channels of Energy and Exchange Rate on Food Sector: A Disaggregated Approach based on Stage of Process

Abstract

The recent concurrent surges of food and energy prices renew our interest on the vulnerability of food system to sudden changes in the energy sector. Unlike previous studies focusing on the impacts of a single energy price on food sector, this study explores such dependency utilizing various food and energy prices classified by stage of processing. Based on the method proposed by Toda and Yamamoto (1995) and Dolado and Lutkepohl (1996) of Granger causality tests, we identify how the movements of the exchange rate and the various energy prices affect on the food prices from farmers to consumers. INTRODUCTION The United States (U.S.) economy heavily depends on energy consumption. The overall food system, from farmers to consumers, is not an exception. According to the Earth Policy Institute, the U.S. food system uses over 10 quadrillion Btu (10,551 quadrillion Joules) of energy each year, which is as much as France’s annual energy consumption and comprises about 10% of the total U.S. energy consumption (Murray, 2005). In addition to the agricultural production, the overall food processing and distribution systems also heavily rely on the energy sector. For example, Heller and Keoleian (2000) suggest that almost 41% is used in the processing and distribution system (14% goes to food transport, 16% to processing, 7% to packing, and 4% to