From field to finance: risk transmission in agricultural commodities

Following the surge in the FAO price index, which triggered the ‘food crisis’ of 2007, there has been heightened interest among academics and policymakers in the agricultural market. This study, driven by the financialization of commodities and the implications of microeconomic theory, aims to explore the interconnectedness of risk among agricultural commodities and examine how this interconnectedness behaves during various types of crises. To achieve this, we employ the innovative R2 connectedness framework, utilizing a daily dataset that covers 17 agricultural commodities, categorized into three groups: Softs, Livestock, and Grains & Oilseeds. This dataset spans from January 2001 to June 2023. Our empirical results reveal clustering among commodities within the same group, with staple commodities dominating the R2 risk spillover networks. During crises, we observe a significant increase in R2 dependency, forming a consistent pattern where Grains & Oilseeds and Softs tend to be net receivers of risk. Notably, staple food items show a higher level of dependency on external risks. Interestingly, both health crises and geopolitical risks appear to have similar effects on risk interconnections, with Rice remaining relatively insulated from the turmoil affecting other agricultural commodities in extreme events. Our findings, compared with other relevant models, demonstrate consistent insights.