Fuel-feed-livestock price linkages under structural changes

ABSTRACT

The large-scale diversion of crops into mandates-driven biofuels since early 2000s, has raised concerns about impacts of biofuel policies on food prices. This study examines crude oil-corn-livestock dynamic linkages from January 1987 until December 2019 in Ontario, Canada. A significant structural break is identified in March 2011 as biofuel policy impacts become fully implemented and splits the three-decade period into pre- and post-break sub-periods. A nonlinear autoregressive distributed lag (NARDL) approach is employed since it allows prices to be tied by asymmetric relationships both in the short- and long-run. The NARDL model bounds test results indicate that crude oil and corn prices have a long-run connection with livestock prices in both sub-periods. In the post-break period, corn price has an asymmetric effect on cattle price in the long-run, with negative shocks in the corn price leading to a greater intensity on the cattle price than positive shocks. The presence of short-run asymmetry is evident in the impacts of crude oil price on both cattle and hog prices. However, the above asymmetric effect is insignificant in the pre-break period.

KEYWORDS:

• Crude oil
• corn
• structural change
• livestock prices
• NARDL model

JEL CLASSIFICATION:

• C22
• Q16
• Q18

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ Source: U.S. Energy Information Administration (EIA) Fuel Ethanol Plant Production Capacity Report (26 August 2019).

² We tried to use both nominal and real prices and found similar estimation results.

³ Perron and Vogelsang (1992) and Perron (1997) have proposed a class of test statistics which allows for two different forms of a structural break: the Additive Outlier (AO) model, which is more relevant for series exhibiting a sudden change in the mean, and the Innovational Outlier (IO) model, which captures changes in a more gradual manner through time. Both models allow a break under both the null and alternative hypotheses and are invariant to the magnitude of the shift in level and/or slope. We also applied the Additive Outlier (AO) model and yielded similar results.

⁴ The bandwidth selection procedure is based on Newey and West (1994).

⁵ We also checked some other potential events, such as crude oil price hike and exchange rate fluctuations. We found the crude oil-corn price connection is weak and the impacts of exchange rates on the oil-corn-livestock price series is very negligible.

⁶ We also estimated ARDL/NARDL models using either corn or oil price as the regressed variable and the bounds test indicated no long-run relationship in either case.

Additional information

Funding

This work was supported by the Education Department of Hunan Province [XJK19BBJ002]; Central South University of Forestry & Technology [2017QZ005].