GLOBAL CRUDE OIL PRICE AND DOMESTIC FOOD COMMODITY PRICES: EVIDENCE FROM INDONESIA

Globally, studies examining the nexus between global crude oil prices and food commodity prices in domestic markets are scant. Employing a panel data model of 34 provinces in Indonesia from 2010 2017, this study investigates the impact of global crude oil’s price change on some local food commodity prices (imported soybean, local soybean, local rice, and local maize). Previous studies found that local food commodity prices in some countries were not affected by global crude oil prices; however, this study, by controlling other factors which could affect local commodity prices, finds different results. This study’s findings indicate that global crude oil prices could affect Indonesia’s local commodity prices due to higher shipping costs in import activity. In addition, global commodity prices are also proved to affect all commodities examined in this study, which implies that local food commodity prices in Indonesia are influenced by the international market. This study provides input to policymakers in Indonesia to consider the movement of global crude oil prices and global commodity prices in stabilizing local food commodity prices in Indonesia, especially the imported commodities.


INTRODUCTION
The dramatic surge of food commodity prices, mainly 2007-2008, has drawn researchers' attention. Many tried to find factors that potentially affected the food commodity price increase.
Initially, the growing economies of emerging countries were suspected of contributing to this issue since they potentially enhanced demand for food commodities (Abbott & Borot de Battisti, 2011;Baffes & Dennis, 2013;Hochman et al., 2014). However, since at the same time, the global oil price also jumped significantly, some studies questioned whether the higher oil price led to the food price crises. It can be shown from a report by Mitchell (2008) that price of maize increased 300%, wheat 127%, and rice 170% from early 2005 until June 2008, while similarly, according to Fowowe (2016), oil price also increased from 2003 and reached a peak in July 2008, of US$ 145 per barrel.
Therefore, economic literature explains the nexus between these two variables considering the possible relationship between energy price and food commodity prices.
Some reasons were believed to cause the linkage between the two variables. Firstly, the higher oil price was thought to enhance biodiesel production that eventually raised the demand and also the price of agricultural commodities as raw material (Headey & Fan, 2008;Mitchell, 2008;Wright, 2014;Yu et al., 2006;Zilberman et al., 2013).
The expansion of biofuel production potentially forces farmers to choose between supplying energy or food that could create food supply scarcity and eventually raise the food price commodities. Secondly, the higher fuel price was argued to directly affect food commodity prices through higher transportation costs and input production costs that finally increased the price of food commodities (Dillon & Barrett, 2016;Fowowe, 2016;Mitchell, 2008). Lastly, oil prices could influence food commodity prices through other channels such as exchange rates because of the domination of the USD (Abbott et al., 2008;Harri et al., 2009 Regarding the scope, While many previous studies mostly took the global market as their observation (Ghaith & Awad, 2011;Mitchell, 2008;Nazlioglu, 2011;Nazlioglu & Soytas, 2012;Zhang et al., 2010;Zilberman et al., 2013), recently, researchers started to analyze the impact of world oil price movement on the trend of food commodity price in domestic markets (Rahim & Zariyawati, 2011;Dillon & Barrett, 2016;Fowowe, 2016;Nazlioglu & Soytas, 2011;Zhang & Reed, 2008 Some studies that used long-run and short-run linear models to examine relationships between oil price and food prices assume that the triggers which could influence the food prices in the long-run are different from those in the short-run (Zhang et al., 2010). However, many studies, which used linear causality model, both in long-run and short-run, found that the relationship between oil price and food prices was neutral both in the global and domestic market (Campiche et al., 2007;Ghaith & Awad, 2011;Nazlioglu & Soytas, 2011;Yu et al., 2006;Zhang & Reed, 2008;Zhang et al., 2010;Zilberman et al., 2013). For example, Yu et al. (2006) concluded that from 1999 (Abbott et al., 2008;Mitchell, 2008;Wright, 2014), and also the work of Benson et al. (2008), Baffes & Gardner (2003), and Minot (2011) Hausman p-value 1.0000 Notes : (a) Robust standard errors in parentheses. (b) ***, **, and * denote statistical significance at 1%, 5%, and 10% respectively.  (Wooldridge, 2015).
In contrast, as presented in Table 2 and Table 3,    Moreover, the exchange rate also significantly influence all examined local food commodity prices. These results support many studies which argued that one of fundamental factor that drove the change of food commodity price is the exchange rate (Abbott et al., 2008;Baffes & Dennis, 2013;Dillon & Barrett, 2016;Harri et al., 2009;Nazlioglu & Soytas, 2011, 2012Nugraheni, 2014