The Evolving Relationships between Agricultural and Energy Commodity Prices: A Shifting-Mean Vector Autoregressive Analysis

We identify the key factors responsible for the general run-up of U.S. grain prices by extending Enders and Holt's (2012) analysis to a time-varying multiple equation setting. Given that the methodology for co-breaking is in its infancy, we utilize two very different methodologies to examine the underlying reasons for shifts in grain prices. A simple VAR indicates the important effects of mean shifts in real energy prices, exchange rates, and interest rates on grain prices. We go on to develop a parametric model of structural change that allows for smoothly shifting means. In addition to the general rise in real energy prices, the introduction of ethanol as an important fuel source has likely contributed to the run-up in grain prices. Income growth in emerging economies and expansionary monetary policies may also have contributed to commodity price run-ups in recent years.