  In this article we analyse the oil-food price co-movement and its
determinants in both time and frequency domains, using the wavelet analysis
approach. Our results show that the significant local correlation between food
and oil is only apparent. This is mainly due to the activity of commodity index
investments and, to a lower extent, to the increasing demand from emerging
economies. Furthermore, we employ the wavelet entropy to assess the
predictability of the time series under consideration. We find that some
variables share with both food and oil a similar predictability structure.
These variables are those that mostly co-move with both oil and food. Some
policy implications can be derived from our results, the most relevant being
that the activity of commodity index investments is able to increase
correlation between food and oil. This activity generates highly integrated
markets and an increasing risk of joint price movements which is potentially
dangerous in periods of economic downturn and financial stress. In our work we
suggest that governments should also provide subsidy packages based on the
commodity traded in commodity indices to protect producers and consumers from
adverse price movements due to financial activity rather than lack of supply or
demand.
