Considering macroeconomic indicators in the food before fuel nexus

A structural vector autoregression (SVAR) model along with a direct acyclic graph is employed to decompose how supply/demand structural shocks affect food and fuel markets. The results support the hypothesis that fundamental market forces of demand and supply are the main drivers of food price volatility. Increased biofuel production may cause short-run food price increases but not long-run price shifts. Decentralized freely operating markets will mitigate the persistence of any price shocks and restore prices to their long-run trends. The main policy implications are that oil, gasoline, and ethanol market shocks do not spillover into grain prices, which indicates no long-run food before fuel issue. In the short-run, grain prices can spike due to market shocks, so programs designed to blunt these price spikes may be warranted.

► The hypothesis that market forces of demand and supply are the main drivers of food price volatility are conformed. ► Increased biofuel production may cause short-run food price increases but not long-run price shifts. ► Oil, gasoline, and ethanol market shocks do not spillover into grain prices, indicating no long-run food before fuel issue.