Long Run Dynamics of World Food, Crude Oil Prices and Macroeconomic Variables: A Cointegration VAR Analysis

This study examines the long-run relationship between the real world price of maize, soybeans and sugar with the real world price of crude oil and a series of macroeconomic variables using a cointegration analysis from January 1982 until December 2012. The main empirical results support a strong causal relationship between maize and soybeans with crude oil, the real interest rate and the real U.S. exchange rate. Concretely, we show that real world crude oil prices are cointegrated with real world prices of maize and soybeans for the entire sample period and that real oil prices have a one-to-one relationship with these commodities. In other words, a one-percent increase in the price of real crude oil is associated with a one-percent increase in the price of maize and soybeans. Moreover, we find that permanent shocks to crude oil prices are transmitted to both maize and soybeans by a factor of 0.67 in both cases. In addition, our results show that despite the instability associated with the period between 2007/08, the long-run relationship between crude oil and these agricultural commodities has remained stable during the entire sample period. Finally, our results also support that although the real interest rate and the U.S. exchange rate are cointegrated with these commodities, it is only permanent shocks to real crude oil prices that have a permanent effect on these commodity price behavior.