Oil price shocks and agricultural commodity prices

- We model joint dynamics between oil and agriculture prices using a structure VAR.
- The effects of an oil shock on agriculture prices depend on its driving forces.
- Oil shocks totally explain 20%-40% of variations in agricultural commodity prices.
- The effects of oil shocks become stronger after recent food crisis.

While the impacts of oil price changes on agricultural commodity markets are of great interest to economists, previous studies do not differentiate oil-specific shocks from aggregate demand shocks. In this paper, we address this issue using a structural VAR analysis. Our findings indicate that the responses of agricultural commodity prices to oil price changes depend greatly on whether they are caused oil supply shocks, aggregate demand shocks or other oil-specific shocks mainly driven by precautionary demand. Oil shocks can explain a minor friction of agricultural commodity price variations before the food crisis in 2006-2008, whereas in post-crisis period their explanatory abilities become much higher. After crisis, the contributions of oil-specific factors to variations in agricultural commodity prices are greater than those of aggregate demand shocks. The results from an alternative SVAR confirm the robustness of our main findings.