Price interconnection of fuel and food markets: Evidence from biodiesel in the United States

The food versus fuel issue has attracted considerable attention with the rapid growth of global biofuel production. The previous literature examining the interconnectedness between biofuel, fossil fuel and agricultural markets employed futures and spot prices. However, food security needs to be discussed with non-financial market prices, such as wholesale prices, since retail companies and households usually do not purchase products directly from financial markets, which encompass speculative activities, making them more volatile than non-financial ones. This paper focuses on non-financial markets in the United States to investigate the price-interconnection of biodiesel, highway diesel, crude oil, and soybean, initially applying partial wavelet coherence and the Diebold-Yilmaz connectedness index to price transmission research on biodiesel, highway diesel, crude oil, and soybean. Our main results are as follows: First, significant coherence between biodiesel and soybean, biodiesel and highway diesel, and highway diesel and crude oil is identified in the short and long term. Second, crude oil and biodiesel prices are found to be net transmitters, while soybean and highway diesel prices are net receivers. Finally, the crude oil market is identified as the source of spillovers among the four markets, and strongly influences the highway diesel market.