Sugar Domestic Production of Major Food Commodities in Indonesia
Figure 2.5 Crude Palm Oil Production in Indonesia Source: BPS-Statistics Indonesia
Overall, shocks in oil price can be transmitted onto food crop commodities through production costs and biofuel demands. This means that fluctuations in oil
prices are expected to influence food prices, posing risks to national food security. Moreover, rising oil prices encourage the use of biofuels as an alternative energy
source. In Indonesia, biofuels are mainly produced from palm oil, corn and sugar cane. These three commodities are not only used for feedstocks, but also for food.
This then leads to lower food supply thereby contributing to higher food prices. These factors combined induce a significant rise in food commodity prices posing
threats to food security in Indonesia.
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15 20
25 30
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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
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Crude Palm Oil
3 LITERATURE REVIEW
An increasing number of studies have investigated the relationship between crude oil and food prices. These studies show a divergence in findings indicating
that the effect of crude oil price volatilities on food commodity prices is not universal. This has motivated researchers worldwide to further investigate such
correlations. The majority of previous studies have highlighted the existence of volatility spillover from crude oil prices to food commodity prices, an effect that is
becoming stronger as biofuel production increases. Such research concurs with crude oil price volatilities being transmitted onto food commodities prices through
two essential elements, namely production inputs transportation and electricity costs, fertiliser and pesticide prices and biofuel production agricultural
commodities as raw materials.
Research investigating volatility spillovers from crude oil onto the food market through production inputs has focused on agricultural commodities used for
staple food and found a strong relationship between them. Research by Baffes 2007 was based on 35 non-energy commodities traded globally, such as food rice,
maize, soybeans, wheat, and sugar, beverages cocoa, coffee, and tea, raw materials cotton, rubber, and timber, fertilisers, and metals silver, aluminum,
copper, nickel, zinc. This author used annual price data from 1960 to 2005 and analysed data using an Ordinary Least Squares OLS regression method. Results
indicate that linkages between crude oil prices and food commodities are stronger compared to other commodities. Furthermore, research results of Balcombe 2011
also suggest a positive correlation. This author’s findings, acquired using the time varying and panel approach, were based on smaller samples covering 19
agricultural commodities, such as rice, soybeans, maize, wheat, meat, cheese, cocoa,
and sugar from 1957 to 2009. A more recent study by Obadi and Korček 2014 investigated the causality, long-run and short-run linkages between price of crude
oil and food products, such as palm oil, wheat, corn, sugar, rice and barley. Data used in this study were monthly commodity prices over the period January 1975 to
September 2013 and by adopting a Granger causality and a VECM model, a long- run relationship between oil and food prices was identified. In addition, in the long-
run, causality is transmitted from oil prices to all food commodity prices, except for barley which has a two-way causality. Similarly, in the short-run, the direction of
causality runs from oil prices to each of the food commodities, except for sugar. These findings, therefore, suggest that the price of agricultural food commodities
used as sources of food react significantly to oil price fluctuations as oil is a primary input in energy intensive farmin
g Obadi and Korček 2014. In order to investigate the impact of the biofuel boom on volatility
transmission between oil and other commodity prices, previous studies have concentrated on agricultural products being used as raw materials for biofuels and
divided analyses into two time periods, namely prior to and after the 2008 global food crisis. Serra 2011 used weekly price data of international crude oil and the
weekly price of ethanol and sugar from July 2000 to November 2009 to investigate volatility transmission between crude oil, ethanol and sugar prices. The methods
used in this study were the semiparametric GARCH and parametric MGARCH. Results indicate that in the long run, crude oil, ethanol and sugar price levels are