On the other hand, this study adopts the Granger Causality test in order to investigate causality relationships between variables with no cointegration
associations Giles 2011; Gogoi 2014. Moreover, the lag lengths generated by the Schwarz Information Criterion SIC are employed in this study because it suggests
the most parsimonious model compared to Akaike Information Criterion AIC.
5.3 VECM Analysis
A VECM model can be used to identify long-run and short-run relationships between the prices of oil and food commodities. This method defines a framework
where the dynamics of the short-run relations of each price series are bound to the long-run equilibrium relations.
As shown in Table 5.3 below, the VECM results confirm a bidirectional long term association between domestic price of maize and crude oil prices, implying
that the price of maize in Indonesia is being caused by crude oil prices and vice versa. Similarly, results show that there is a bidirectional long term relationship
between domestic petroleum prices and crude oil prices. Therefore, these results indicate that in the long run crude oil prices can directly affect the domestic price
of maize through changes in the cost of production due to the intensive use of fossil fuel, whereas the reverse relationships suggest that the domestic price of maize and
petroleum seem to be the leading indicator of crude oil price fluctuations.
Table 5.3 Results of VECM
Relationships Direction of Causality
Domestic Food Commodity – Crude Oil:
Domestic Maize – Crude Oil
LMZ ⇔ CO
Domestic Petroleum – Crude Oil:
Domestic Petroleum – Crude Oil
PO ⇔ CO
World Food Commodity – Crude Oil:
World Rice – Crude Oil
WRC ⇔ CO
World Wheat – Crude Oil
WWHT ⇔ CO
World Soybean – Crude Oil
WSOY ⟹ CO
World Palm Oil – Crude Oil
WPLM ⟹ CO
Domestic Food Commodity – World Food Commodity:
Domestic Maize – World Maize
WMZ ⟹ LMZ
Domestic Wheat – World Wheat
LWHT ⇔ WWHT
Domestic Soybean – World Soybean
WSOY ⟹ LSOY
In the context of world food commodity prices and crude oil prices, results reveal unidirectional long-run causalities from world soybean prices to crude oil
prices and from world palm oil prices to crude oil prices. The existence of these relationships may be caused by massive use of soybeans and palm oil as feedstocks
in the production of biofuel during the past decade. Furthermore, results show bidirectional causalities between rice prices in the world market and crude oil prices,
and world wheat prices and crude oil prices. This means that volatilities in crude oil prices can be directly transmitted onto rice and wheat prices in the world market in
the long run and inversely, changes in the world prices of rice and wheat can affect crude oil prices. The volatilities spillover from the world price of wheat onto the
price of crude oil may occur as wheat is used for producing biofuels. Thus, rising
