Examining Price Transmission between Fuels and Food Prices: the Brazilian Sugar-Ethanol Market

Nowadays, Brazil is the world’s biggest sugar producer and exporter, as well as the world’s largest producer and consumer of sugarcane ethanol as a transportation fuel. The growth of this market has occurred due to a combination of government policies and technical change, both in the sugarcane processing into ethanol and in the manufacturing of flex-fuel vehicles. However, in recent years, the ethanol production has been questioned due to the possible impact on food prices. This work aims to explore the impact of Brazilian ethanol prices on sugar and gasoline prices. The relationships among these series are investigated using vector error corrections (VECM). Impulse response functions and forecast error variance decompositions are also computed in order to investigate the interrelationships within the series. Results suggests that ethanol prices are affected by both food and fuel price, but there is not strong evidence that changes in ethanol prices affect food prices