The Energy-Food Nexus : Exploring the Effects of Biofuel Policy on Crude Oil and Corn Market Connectivity

The rapid growth of US ethanol production, driven by the Energy Policy Act of 2005, has raised questions about the linkages between energy and food prices. In this study, we explore the impact of the biofuel policy by testing the hypothesis that increased ethanol production has strengthened these linkages. To do this, we employ standard and partial wavelet transform models to analyze the data and contribute to the literature on the effects of this policy measure on fuel and food markets, specifically crude oil and corn. Moreover, to uncover the hidden relationship between these goods, we utilize partial wavelet coherence and control for a commodity price index, effectively eliminating the influences of the broader commodity markets. This approach enables us to focus on the specific pair relationship of interest. Our primary finding indicates significant correlations between crude oil and corn prices in the mid- and long-term frequencies, following the implementation of the Energy Policy Act of 2005. This highlights the impact of the policy measure on the connectivity between these two markets. By providing insights into the effects of biofuel policies on fuel and food market dynamics, this study contributes valuable insights to the existing literature