The effect of oil in the price of selected food commodities
Date
2008-10
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Abstract
The study analyses the relationship between the price of oil and of selected food commodities. The extension of Popkin's stage-of-processing model in general price determination was applied, wherein the current and lagged prices of resources, complements and substitutes, lagged own price and seasonality were included as variables.
Using the correlation matrix analysis and least squares estimation, the significance of oil as an explanatory variable for the prices of food commodities was then determined. The correlation matrix showed a high positive correlation between diesel oil and food prices. However, using the least squares estimations, it was found that diesel oil prices, though significantly affects retail prices of some food commodities, is not a major factor which causes food prices to increase with respect to diesel oil prices. Previous prices of the food commodity and even the current and previous prices of its substitutes have greater effects on food prices.
Thus, food price stabilization is not just a matter of keeping input prices such as oil to as low as possible; but primarily, guarding the general price level.
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Keywords
Oil, Oil price, Fuel industry, Fuel, Fuel pricing, Food commodities