IS THERE DANGEROUS LIAISON BETWEEN FOOD AND FUEL? EVIDENCE FROM THE CBOT FUTURES MARKET

IS THERE DANGEROUS LIAISON BETWEEN FOOD AND FUEL? EVIDENCE FROM THE CBOT FUTURES MARKET During 2007-2008 the price per barrel of oil almost tripled and then dropped back to its Initial levels. It was argued that the common oscillation in the price of wheat might depend on its increasing use to make bio-fuel. In turn. the abrupt raise in the price of wheat made foodstuffs relatively more expensive vis-r-vis other goods and, since food absorbs a larger share of the consumption basket for poor countries (households) worries surfaced on inequality and poverty, Being oil an exhaustible resource, those worries - now abated by the global crisis - could come back when the world economy will recovers: the price of wheat might be pushed up again by Il new surge in the price of oil. But is this co-movement between the two price a spurious correlation or is it really driven by a causal nexus going from the price of oil to the price of wheat? To answer this question we employ data from CBOT future prices - from the beginning of November 1998 to mid January 2009 - and develop a noveI identification strategy. Via event study methodology we check whether wheat prices have increased based on negative events when OPEC meetings set oil production below expectations - and decreases because of positive events - and when OPEC meetings set oil productions. While we failed to detect any significant change in the price of wheat around negative events, we do find that the price of wheat decreased significantly (on the occasion of positive oil price events. Though caution is in order considering the small number of positive events, our evidence suggests a causal link going from oil prices to wheat prices. This appears consistent with the conjecture that bio-\fuels are indeed providing a link between the two market. The worries on poverty seem germane.