On the Interdependence between Biofuel, Fossil Fuel and Agricultural Food Prices: Evidence from Quantile Tests

This study investigates the long- and short-run relationships between fossil fuel, biofuel and agricultural food commodity prices by applying the cointegration and causality analysis. We employ a quantile approach to consider the non-linearity and asymmetry in the relationship of data. To reduce the noise contained in the data, we use weekly average data of biofuel (ethanol), fossil fuel (West Texas Intermediate [WTI] oil) and agricultural food commodity (corn) futures prices. The main findings are summarised as follows. First, we discover no evidence of long-run relationship between the quantiles of WTI oil, ethanol and corn prices when all quantiles are considered, although the results of the linear cointegration test are inconclusive. Second, results of the Granger causality test in quantiles reveal a significant short-run bidirectional causality between the returns of WTI oil, ethanol and corn prices, for all or most quantiles of the distribution. This implies asymmetric and nonlinear causal linkage between these variables. Moreover, the results of our analysis have several policy implications, including energy price stability, decrease in energy dependence on fossil fuels, promotion of agricultural industry, environmental sustainability, energy conversion and reduction of greenhouse gas emissions.