The influence of biofuels, economic and financial factors on daily returns of commodity futures prices

• The effects of biofuels and other economic and financial factors on daily returns of commodity futures prices are examined.
• A GARCH methodology in univariate and multivariate settings is adopted.
• The results show that a complex of drivers is relevant in explaining commodity futures returns.
• Energy market returns play a significant role in pushing commodity returns.
• The increase in monetary liquidity does not contribute to changes in futures returns on a daily basis.

Biofuels production has experienced rapid growth worldwide as one of the several strategies to promote green energy economies. Indeed, climate change mitigation and energy security have been frequent rationales behind biofuel policies, but biofuels production could generate negative impacts, such as additional demand for feedstocks, and therefore for land on which to grow them, with a consequent increase in food commodity prices. In this context, this paper examines the effect of biofuels and other economic and financial factors on daily returns of a group of commodity futures prices using Generalized Autoregressive Conditional Heteroskedasticity (GARCH) family models in univariate and multivariate settings. The results show that a complex of drivers are relevant in explaining commodity futures returns; more precisely, the Standard and Poor׳s (S&P) 500 positively affects commodity markets, while the US/Euro exchange rate brings about a decline in commodity returns. It turns out, in addition, that energy market returns are significant in explaining commodity returns on a daily basis, while monetary liquidity is not. This would imply that biofuel policy should be carefully monitored in order to avoid excessive first-generation subsidization, which would trigger a fuel vs. food conflict.