Have food and financial markets integrated? An empirical assessment on aggregate data

This paper analyzes co-movements and discusses possible market integration between aggregate food and stock markets in the period of 1990 to 2012. Correlations, price return distributions, cointegration, and Granger-causalities are tested in subsamples on monthly FAO Food Price Index and MSCI World Stock Market Index data to better assess why and whether linkages between food and financial markets have increased. Empirical results suggest that while there is only weak indication of greater co-movements concurrent with structural changes such as changed agricultural policies, new demand due to growth in emerging markets and energy mandates, and the financialization of food markets since the early 2000s, they did start to increase in particular substantially during the financial stress of the Lehman crisis and the Great Recession. It is concluded that while structural changes may have amplified price linkages across markets, results do not suggest that they are the key factors for greater price co-movements. Instead, it is discussed that the effects of the late-2000s recession as a time of great economic weakness and uncertainty may have changed concurrently the behavior of both food and financial market participants, such that different market prices exhibit increased co-movements.