The energy-food nexus: Exploring the effects of biofuel policy on crude oil and corn market connectivity

Abstract

The rapid growth of US ethanol production, driven by the Energy Policy Act of 2005 and the Energy Independence and Security Act of 2007, has raised questions about intensifying price linkages between energy and food markets. This is based on the premise that higher crude oil prices incentivize ethanol producers to increase production, thereby boosting corn demand. This study explores the impact of biofuel policies by testing the hypothesis that increased U.S. ethanol production has strengthened these linkages. Previous literature overlooked the fact that both fuel and food goods tend to move together with the commodity price index, which can often change in response to interest rates, monetary supply, or the U.S. dollar index. To overcome this deficiency, we filter out the 'noises' from the commodity price index by controlling for the index with the partial wavelet transform and present more accurate relationships between crude oil and corn prices. Our primary finding reveals significant mid- and long-term correlations between crude oil and corn prices from 2007. This suggests that U.S. biofuel policies could strengthen the connectivity between crude oil and corn prices.