Wheat Domestic Production of Major Food Commodities in Indonesia

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