We use the recent introduction of biofuels to study the effect of industry factors on the relationships
between wholesale commodity prices. Correlations between agricultural products and oil
are strongest in the 2005-09 period, coinciding with the boom of biofuels, and remain substantial
until 2011. We disentangle three possible drivers for the linkage: substitution, energy costs, and
financialization. The timing and magnitude of the biofuels-to-oil relationships are different to those
of other commodities, ...
We use the recent introduction of biofuels to study the effect of industry factors on the relationships
between wholesale commodity prices. Correlations between agricultural products and oil
are strongest in the 2005-09 period, coinciding with the boom of biofuels, and remain substantial
until 2011. We disentangle three possible drivers for the linkage: substitution, energy costs, and
financialization. The timing and magnitude of the biofuels-to-oil relationships are different to those
of other commodities, and far higher than can be justified by costs and financialization. Substitution
and costs drive the monthly correlations of long-term futures, and each of the three contribute
equally to the daily co-movement of the short-term ones. The findings survive many robustness
checks and appear in the stock market.
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