Oil Price Pass through to Agricultural Commodities†

Abstract

Energy represents an important share of production costs for many agricultural commodities. Previous studies have found mixed evidence of a pass‐through relationship between oil prices and agricultural commodity prices, a relationship that has the potential to disrupt farm‐level decision making. We propose that these mixed findings are in part due to heterogeneity in the pass‐through relationship across time horizons. We use a new wavelet‐based regression approach to explore horizon‐based heterogeneity in the relationship between oil and agricultural commodity prices. We find strong evidence of heterogeneity across time horizons and commodities. We develop a stylized model of agricultural production and show that agricultural contracts can generate price stickiness that leads to heterogeneity in input price pass through over different horizons. We also find evidence that recent technological shifts have led to a structural change in this horizon‐based heterogeneity.