Volatility Linkages between Energy and Wine Prices in South Africa

Although a large number of studies have examined the price spillover in global oil and agricultural commodity markets, very little is known about the volatility of transmission between energy and wine prices in South Africa. The South African wine industry practices a form of industrialised agriculture that relies heavily on energy inputs to not only grow grapes but also process and distribute wine to different locations. This study investigates price and volatility risk originating from the linkages between energy and wine prices in South Africa and identifies their dynamics over time. We employ an econometric approach to quantify the volatility and correlation risk structure, which has a large impact on investment and hedging strategies of market participants and policy makers. The short-run and long-run volatility linkages are analysed using a constant conditional multivariate GARCH model. The empirical findings indicate significant and positive effects on wine prices due to the volatility of energy prices. The findings also confirm a clear correlation between wine and fuel prices, implying that the two markets are positively dependent to the extent that a change in fuel price influences wine price. This suggests that policy makers should establish appropriate hedging facilities to mitigate the risks associated with energy price volatility as it affects wine price.