Ethanol prices and agricultural commodities: An investigation of their relationship

Abstract

Brazil is an important player when it comes to biofuel and agricultural production. The knowledge of the price relationship between these markets has increasing importance. This paper adopts several tools, namely the Bai-Perron test of breakpoints, the Johansen cointegration test and the vector error correction model exploited by the orthogonal impulse response and the forecast error variance decomposition, for investigating the price transmission among the ethanol and the main Brazil's agricultural commodities (sugar, cotton, arabica coffee, robusta coffee, live cattle, corn and soybean). The data series cover the period from January 2011 up to December 2018. The results suggest a stronger price transmission from the ethanol commodity to the agricultural commodities, rather than the opposite situation.