An investigation into the relationship between sugarcane and grain prices in Brazil: a fractional cointegration approach

We investigate cointegration in prices of corn, soybean and sugarcane in Brazil using a fractional integration analysis, fractional cointegration in a pairwise set-up and fractional cointegrating vector autoregressive (FCVAR) set-up. Monthly real prices of sugarcane, corn and soybean are considered, in the period between March 2006 and May 2022. The results of fractional integration first show that the prices of these agricultural commodities are non-mean reverting, and cointegrated in a pairwise fractional sense. The results, based on the FCVAR model, show the prices of the three commodities moving in different directions, that is, sugarcane and soybean negatively, while sugarcane and corn, and corn and soybean move in positive directions. The positive relationship between sugarcane and corn has implications for the ATR ('acucar total recuperavel' - total recoverable sugar, TRS) pricing of derivatives of two commodities, such as sugar and ethanol. Also, corn and soybean are close substitutes and are expected to have similar pricing dynamics over time.