“Volatility in a Mug Cup”: Spillovers among cocoa, coffee, sugar futures and the role of climate policy risk

Hot beverages have surged in popularity due to the increasing emphasis on healthy living among consumers. This trend extends upstream to prosper futures markets for essential raw materials within the supply chain. However, there is a significant gap in the literature concerning volatility spillovers within these futures markets, specifically cocoa, coffee, and sugar futures. Given the susceptibility of these raw material agricultural productions to weather conditions, an intriguing question emerges regarding the potential impact of climate policy uncertainty on the volatility spillover dynamics of these commodity prices. This study employs the TVP-VAR-DY methodology to quantify volatility spillovers among global mainstream cocoa, coffee, and sugar futures, then the Time-Varying Granger Causality test is deployed to uncover the influence of climate policy uncertainty. The findings underscore a pronounced and statistically significant spillover effect among the volatilities of coffee-related commodity futures, with the U.S. sugar futures market emerging as a pivotal conduit for risk transmission. In exploring the impact of climate policy uncertainty, it is discerned that global climatic patterns exert some unique and substantive influence on systemic risk spillovers. These insights provide a basis for stakeholders in the hot drink industrial chain to think about effective risk management mechanisms.