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Price and volatility Price and

volatility
transmissions between natural transmissions
gas, fertilizer, and corn markets
Xiaoli Liao Etienne 151
Division of Resource Management, Received 30 October 2015
West Virginia University, Morgantown, West Virginia, USA Revised 31 January 2016
Accepted 2 February 2016
Andrés Trujillo-Barrera
Marketing and Consumer Behaviour Group,
Wageningen University, Wageningen, The Netherlands, and
Seth Wiggins
Division of Resource Management,
West Virginia University, Morgantown, West Virginia, USA

Abstract
Purpose – The purpose of this paper is to investigate the price and volatility transmission between
natural gas, fertilizer (ammonia), and corn markets, an issue that has been traditionally ignored in the
literature despite its significant importance.
Design/methodology/approach – The authors jointly estimate a vector error correction model for
the conditional mean equation and a multivariate generalized autoregressive heteroskedasticity model
for the conditional volatility equation to investigate the interactions between natural gas, ammonia,
and corn prices and their volatility.
Findings – The authors find significant interplay between fertilizer and corn markets, while only a
mild linkage in prices and volatility exist between those markets and natural gas during the period
1994-2014. There is not only a positive relationship between corn and ammonia prices in the short run,
but both prices react to deviations from the long-run parity. Furthermore, the lagged conditional
volatility of ammonia prices positively affects conditional volatility in the corn market and vice versa.
This result is robust to a specification using crude oil price as an alternative to natural gas price to
account for the large transportation cost built into ammonia prices. Results for the period of 2006-2014
indicate virtually no linkage between natural gas prices and those of fertilizer and corn during that
period, while linkages in price level and volatility between the latter remain strong.
Originality/value – This paper is the first in the literature to comprehensively examine the role of
fertilizer on corn prices and volatility, and its relation to natural gas prices.
Keywords Price, Conditional volatility, Corn, Fertilizer, Natural gas, Transmission mechanism
Paper type Research paper

Commodity markets have experienced significant price volatility over the past two
decades. For example, the World Bank food price index increased over 15 percent
between 1994 and 1996, followed by a 15 percent decrease over the following two years.
Large price increases were observed again after 2006, particularly during 2007-2008
and 2010-2011, when the annual price increase surpassed 20 percent. Starting from the
end of 2012, however, commodity prices plummeted, declining over 30 percent in the
next two years[1]. Such enormous price volatility can have negative consequences by Agricultural Finance Review
Vol. 76 No. 1, 2016
pp. 151-171
The authors thank Manuel Hernandez for help with the volatility impulse response functions and © Emerald Group Publishing Limited
0002-1466
John Baffes for help with the data. DOI 10.1108/AFR-10-2015-0044
AFR complicating price discovery and management of market risk, particularly to those in
76,1 countries that heavily trade agricultural commodities. Previous studies indicate that
political unrest in low-income countries may have been linked to commodity price
volatility (Arezki and Bruckner, 2011; Bellemare, 2015).
Given these adverse impacts, a large body of literature examines the underlying
drivers behind the commodity boom-and-bust cycle, with the majority focussing on
152 how demand shapes commodity price behavior. For instance, the recent 2006-2011
price spike is often attributed to heightened demand from developing countries
(e.g. Gilbert, 2010), US dollar depreciation (e.g. Abbott et al., 2008), excessive speculation
in commodity markets (e.g. Masters, 2008), and growing biofuel production that diverts
agricultural commodities away from food consumption (e.g. Wright, 2011). With the
exception of cost variations associated with oil prices (e.g. Serra and Zilberman, 2013),
the extent to which input-price-driven supply fluctuations could impact commodity
prices has received far less attention in the literature. As an integral element of the
economic incentives for agricultural production, input prices affect not only the supply
of agricultural commodities and their price variability in developed countries, but also
the ability of poor people to produce or secure sufficient food, posing welfare issues in
developing nations.
Few research has examined how fertilizer could drive agricultural commodity prices
and their volatility. Fertilizer prices experienced large run-ups during the recent price
spike. When the price of food and precious metals doubled and energy prices increased
by 230 percent between 2003 and 2008, fertilizer prices experienced a fourfold increase
(Piesse and Thirtle, 2009; Baffes and Haniotis, 2010). Clearly, as one of the main inputs
for US agricultural production, the dramatic price volatility of fertilizer could
significantly impact agricultural commodity prices. For instance, Headey and Fan
(2008) estimate that fertilizer prices alone account for over a third of total operating
costs and 15-20 percent of total costs in the US corn production, and that the costs of
corn production in the USA over 2001-2007 would have been 30-40 percent lower if the
increase of fuel, fertilizers, and other oil-related farm productions cost were ignored.
Mitchell (2008) provides similar arguments, though with different magnitudes.
The main input used to produce nitrogenous fertilizers (e.g. urea and ammonia) is
natural gas, which typically accounts for over 40 percent of fertilizer prices. Volatility
in natural gas prices has had important consequences in the fertilizer industry.
For instance, Huang (2007) estimates that ammonia production in the USA declined by
44 percent between 2000 and 2006 due to increasing US natural gas prices. Triggered
by improved hydraulic fracturing and horizontal drilling techniques, the recent shale
boom that began in 2006 has kept natural gas prices at a reliably low level, leading to a
possible reversal of US fertilizer production. A closer tie between the natural gas and
fertilizer markets in the USA is expected as fertilizer companies take advantage of the
record-low natural gas prices. Such a change could have important implications to the
agricultural industry.
The purpose of this paper is to investigate the price and volatility transmission
mechanisms between natural gas, fertilizer, and the US corn markets. Previous studies
on inter-commodity volatility transmissions have mostly focussed on the linkage
between crude oil and agricultural commodity markets (e.g. Du et al., 2011; Wu et al.,
2011; Trujillo-Barrera et al., 2012; Gardebroek and Hernandez, 2013). Despite the
importance of fertilizer in agricultural production, little research exists regarding the
price and volatility spillovers from fertilizer and natural gas prices to agricultural
commodity prices. This question is reinforced in Piesse and Thirtle (2009, p. 125),
who argue that “the impact of fertiliser prices has not attracted the attention it Price and
warrants. In developing countries, it will have serious impacts on the ability of volatility
smallholders to maintain the gains they have made. In developed countries it will be
exacerbated by the cost of fuel on the farm and by increased costs of transporting food
transmissions
items.” They further comment that “this much of an increase suggests that fertiliser
prices must have been in part responsible for the recent price spike, but the question is
how much” (Piesse and Thirtle, 2009, p. 129). A deeper understanding of how price and 153
volatility interact in these three markets is clearly warranted. Understanding these
relationships provides useful information to both producers and consumers in the corn
and the fertilizer markets who wish to manage their price risks and policymakers who
wish to assess the broad macroeconomic impact of natural gas production on the food
and fertilizer industry.
We use a vector error correction model (VECM) to examine the short- and long-run
price dynamics between the natural gas, fertilizer, and corn markets[2]. To evaluate
the inter-market volatility spillover, we use a similar multivariate generalized
autoregressive conditional heteroskedasticity (MGARCH) framework as in Gardebroek
and Hernandez (2013) and Sidhoum and Serra (2016). We find evidence of price and
volatility interplay between ammonia and corn markets and mild transmission from
natural gas to the other two markets. The relationship between fertilizer and corn is
strong in both their long-run price relationship (cointegration) and in volatility
spillovers (in both directions). Volatility spillovers from natural gas prices to corn
prices for the sub-sample of 2006-2014 vanish, corresponding to the boom in shale gas
production in the USA. The shale production-driven oversupply of natural gas in the
USA kept natural gas prices at low levels, but this lower price and reduced volatility
has not yet transmitted to the other markets.
The rest of the paper is organized as follows. The next section reviews fertilizer
markets and its relation to commodity prices. Third section presents the econometric
methods used in the paper, followed by a discussion of the data. Results are presented
in fifth section. The last section concludes the paper.

How the fertilizer market relates to commodity prices

Agricultural production is energy intensive, consuming fossil fuels directly for
transportation and heating as well as indirectly through the use of energy intensive
inputs such as fertilizer. Fertilizer is a key input that can be applied to the soil to ensure
soil quality and increase crop yields. Smith et al. (1990) estimate that corn yields would
be 41 percent lower without the use of fertilizer. Similar results were obtained in a
number of other studies (see Stewart, 2012 for a summary). The important role of
fertilizer application in maintaining crop productivity suggests that fertilizer prices
faced by farmers could be an integral element of economic incentive to agricultural
production, which in turn directly shapes commodity price fluctuations.
Three principal types of fertilizers exist in the market: nitrogen, potash, and
phosphate. Nitrogen is critical for yield growth and quality improvement in crops, while
phosphorus and potassium are responsible for plant maintenance. As of 2010, 97 percent
of the corn acreage in the USA received nitrogen fertilizer, and on average 127 pounds of
nitrogen were applied to these acreages[3]. Ammonia is one of the most popular types of
nitrogen fertilizer applied due to its low production cost, high nitrogen content, and
relative stability in soils[4]. Over 30 percent of the nitrogen fertilizer consumed in the
USA comes in the form of anhydrous ammonia (Slater and Kirby, 2014). Ammonia is also
the most widely used source of nitrogen fertilizer for US corn production (Moore, 2008).
AFR Natural gas is the main input used to produce ammonia. Approximately 34.4 million
76,1 BTU of natural gas is required to produce one ton of ammonia. Huang (2007) argues
that, depending on the size of ammonia plant and the price of ammonia, 72-85 percent
of the ammonia production cost may be attributed to natural gas. Other studies have
estimated a similar percentage of contributions. High natural gas prices could
significantly increase fertilizer production costs, leading to higher nitrogen fertilizer
154 prices paid by farmers. Huang (2009) compares the ammonia production and price data
with natural gas prices from 1999 to 2008, and finds that high and volatile natural gas
prices contributed to both the heightened ammonia prices and ammonia plant closures
in the USA. While natural gas prices grew at over 14 percent annually from 1999 to
2008, annual ammonia production and production capacity in the USA declined by
37 and 42 percent during this period, respectively (Huang, 2009). Due to the dramatic
increase in shale production in recent years, natural gas prices have remained at a
relatively low level. The abundance of natural gas in the domestic market is likely to
reverse the US fertilizer production pattern.
While a variety of factors other than natural gas prices may contribute to fertilizer
prices (for a summary of contributing factors, see Huang, 2009), the role of commodity
prices is particularly important. High agricultural commodity prices are likely to
encourage fertilizer application and thus contribute to higher fertilizer prices, while low
commodity prices have price dampening effect. This relationship has become
increasingly important in recent years due to ethanol production that significantly
increased corn demand. Ethanol production capacity underwent a massive wave of
expansion through 2010, contributing to the heightened corn prices and large net cash
returns for agricultural producers in the USA. The high profit margin associated with
corn production has led farmers in the USA to increase fertilizer application to achieve
maximum yield (Huang, 2009). In addition, in responding to the 2012 drought in
Midwest, farmers may have increased fertilizer application to make up for the yield
loss. Such increased use of fertilizer undoubtedly could put upward pressure on
fertilizer prices.
The discussion above highlights the important role fertilizer prices could play in
commodity price formation, and vice versa, as well as how natural gas prices could
shape fertilizer prices. However, little research has examined either of this
relationships. A study undertaken by GAO (2003) finds that both retail and
imported fertilizer prices tend to follow natural gas prices, and that higher natural gas
prices have detrimental financial consequences to US fertilizer producers. Both factors
lead to reduced domestic fertilizer production and higher prices. In responding to the
food price spike in 2007-2008, Headey and Fan (2008) estimate that fertilizer prices
alone account for over a third of total operating costs and 15-20 percent of total costs in
the US corn production, and that the costs of corn production in the USA over
2001-2007 might have been 30-40 percent lower if the increase of fuel, fertilizers, and
other oil-related farm productions cost were ignored. Mitchell (2008) estimates that the
combined energy, chemical, and fertilizer costs accounted for 34 percent of the
production costs of corn in the USA. Since the USA accounts for 40 percent of global
grain exports, increases in production costs due to higher energy, chemical, and
fertilizer prices had been quickly passed into global food prices, likely accounting for a
10-15 percent increase in the global food CPI.
More recently, Ott (2012) finds that there is a substantial degree of co-movement
between fertilizer and food prices. However, a Granger-causality analysis shows that
the causal relationship between these two prices is uni-directional, as food prices have
been driving fertilizer price movement but not vice versa. Ott (2012) further examines Price and
the volatility pattern of food and fertilizer prices, finding that the volatility of the two volatility
prices track the volatility of energy prices only when the latter price is rising. Geman
and Eleuterio (2013) find that corn prices experienced a structural break in the second
transmissions
half of 2006, predating the break in the fertilizer market that occurred in April 2007.
They attribute the delayed response in the fertilizer market a result of market
concentration as producers may have had some degree of control over fertilizer prices. 155
This conclusion is in line with the results of Hernandez and Torero (2013) who suggest
that a high level of market concentration exists in the global fertilizer industry, possibly
contributing to asymmetric price transmission based on market power along the
supply chain. Ruder and Bennion (2013) argue that while the insufficient domestic
production may have been a contributing factor of increased fertilizer prices, the main
driver of fertilizer prices prior to 2013 was the high demand due to record-high grain
prices. They further argue that the low natural gas prices in the USA after 2009 is
unlikely to be translated into lower fertilizer prices in the short run due to capacity
constraints of fertilizer producers. O’Hara et al. (2015) estimate the impact of higher
phosphate fertilizer prices on US crop production, finding that fertilizer application
rates decline and US wheat acreage shifts to corn and soybeans if global phosphate
prices triple. As far as the authors are aware, there have been no comprehensive study
on the price and volatility transmission between natural gas, fertilizer, and agricultural
commodity prices in the literature.

Econometric methods
We use time series procedures to examine the linkages between natural gas,
fertilizer, and agricultural commodity prices. Following Sidhoum and Serra (2016),
we investigate a; few statistical properties prior to formally modeling the pricing
relationship, including nonstationarity, co-movement, and volatility clustering.
Nonstationary variables tend to have time-changing mean and variance. Applying
standard statistical procedures to nonstationary time series data may generate
spurious regression results. In the event that variables exhibit nonstationarity,
which is likely for commodity prices, first difference is necessary in order to obtain
stationary time series variables. If individual series are nonstationary, however, they
may be “cointegrated” so that each variable cannot wander too far from long-run
relationships. Cointegrated variables are commonly modeled by error correction
type models that consider both short- and long-run dynamics. Finally, time series
data may exhibit time-varying and clustering volatility, invalidating the standard
regression methods that requires individually and identically distributed errors.
To properly account for the error structure, autoregressive conditional
heteroskedasticity (ARCH) models or the more generalized GARCH models should
be estimated.
Following this line of analysis, we consider a vector error correction multivariate
GARCH model (VECM-MGARCH) as in the following equation in the event of
cointegration, to examine the price and volatility spillovers between natural gas,
fertilizer, and agricultural commodity prices:

X
p
DP t ¼ bj DP tj þ aECT t1 þ et ; et 9I t1  ð0; H t Þ; (1)
j¼1
AFR where Pt is a 3 × 1 vector including prices of natural gas, fertilizer, and agricultural
76,1 commodity, Δ is the first difference operator, βj is a 3 × 3 matrix of autoregressive
coefficients that models the short-run dynamics between the three data series, p is the
lag length, ECT is the error correction term that describes the long-run relationships
between the three variables, and α is a 3 × 1 vector that characterizes the speed
of adjustment when deviations from the long-run relationship occur. Additionally,
156 εt is a 3 × 1 vector of disturbance term. Conditional on past information It−1, the
variance-covariance matrix of the error term is characterized by matrix Ht.
We use the Baba-Engle-Kraft-Kroner (BEKK) model to specify the conditional
covariance matrix Ht. The BEKK model was first proposed by Baba et al. (1990) and
later extended by Engle and Kroner (1995). It not only provides a direct estimation of
the conditional covariance matrix, but also significantly reduces the dimension of the
parameter vector in Ht while at the same time ensuring positive definiteness of
the conditional covariance matrix. The BEKK model with one lag can be expressed as
in the following equation:

H t ¼ CC 0 þ A0 et1 e0t1 Aþ B0 H t1 B; (2)

where C is a 3 × 3 lower triangular matrix that corresponds to the constant, et1 e0t1 are
the squared lagged errors, A is a 3 × 3 matrix of ARCH parameters containing elements
measuring the degree of innovation from one market to another, and B is a 3 × 3 matrix
of GARCH parameters that shows the persistence in conditional volatility between two
markets. The BEKK-MGARCH model has been recently used in a number of papers
to investigate volatility transmission between markets, including Serra et al. (2011),
Jin et al. (2012), Gardebroek and Hernandez (2013), Sidhoum and Serra (2016), etc.
The conditional mean specified in Equation (1) and conditional variance specified in
Equation (2) jointly defines the VECM-MGARCH model used in this analysis.
The model can be estimated using the maximum likelihood procedure as outlined in
Seo (2007) and Serra et al. (2011). Direct interpretation of the parameters estimated for
the MGARCH model is challenging. Therefore, we complement the analysis by
calculating volatility impulse response functions (VIRF), that reflects the path of
volatility transmission between two markets (e.g. Jin et al., 2012). We follow Gardebroek
and Hernandez (2013) to generate the VIRFs to a shock originated in another market
that increases its conditional volatility by 1 percent.

Data
The data used in this analysis come from a number of sources, and are sampled at a
weekly frequency. The fertilizer price is represented by ammonia price in the USA
Midwest, and is obtained from the World Bank Commodity Markets Outlook. For
agricultural commodities, we consider corn, one of the largest corps in the world. Corn
is also one of the crops most reliant on nitrogen fertilizer. Weekly corn prices refer to
the rolling nearby prices of No. 2 yellow corn futures contract traded on the Chicago
Board of Trade. The natural gas prices refer to the rolling nearby prices of futures
contract traded on the New York Mercantile of Exchange, and are obtained from the
Energy Information Administration. To match the weekly frequency of fertilizer prices,
Thursday prices are used for both corn and natural gas. The sample period considered
is January 1994-December 2014, accounting for the fact that natural gas futures
contracts were not actively traded prior to 1994. Overall, 1,094 observations are
included in the analysis.
 Figure 1 plots the three price series during the sample period. A few patterns emerge Price and
from the plot. First, the sample period includes times when corn prices were rising volatility
(1994-1996), low and stable (1998-mid-2007), booming (mid-2007-February 2008),
sharply dropping (March 2008-year end-2009), and booming and dropping again
transmissions
(2010-2014). Similar price patterns are observed in fertilizer prices, except that they
never returned to the pre-crisis level after the 2008 financial crisis as in the corn market.
Natural gas prices behaved somewhat differently. A large spike is observed in three 157
periods: 2000-2002, 2004-2005, and again in 2007-2008. Notably, natural gas prices
have remained at a relatively low level since 2009, fluctuating between $2.5 and
$5.0 per million British Thermal Units (mmBTU). Additionally, much less
correspondence is observed between natural gas and fertilizer prices after 2009.
The decoupling of these two prices echoes the argument of Ruder and Bennion (2013)
that fertilizer producers in the USA are unable to scale up production capacity fast
enough to take full advantage of the lower natural gas prices. However, a general
increase in prices is seen in each market before the 2008 price spike, since 2002 for
natural gas and ammonia, and starting in 2006 in the corn market. Huang (2009)
suggests that annual ammonia production in the USA declined from 17.9 to 11.2 million
ton from 1999 to 2008, a 37 percent reduction, contributing to price increases in the
ammonia market. Finally, we note that for all three price series, large run-ups and drops

Natural Gas
15.0
12.5
$ per million BTU

10.0
7.5
5.0
2.5
0.0
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Year

Ammonia
1,200
1,000
800
$ per Ton

600
400
200
0
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Year

Corn
9

7
$ per Bushel

5
Figure 1.
3 Time series plots of
natural gas,
1 ammonia, and corn
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 prices (1994-2014)
Year
AFR are observed during the 2007-2008 period, highlighting the broad impact of the
76,1 financial crisis on commodity prices during that period. Previous research has showed
the possibility of bubble migration from the financial market to other markets
(e.g. Phillips and Yu, 2011).
Figure 2 plots the one-year rolling coefficient of variation (standard deviation
divided by mean) for the three price series. The coefficient of variation provides a
158 normalized measure of standard deviation, and can be used to compare the relative
volatility of different price series. Visual inspection of the three series suggests that the
volatility of the three prices tends to be positively correlated, particularly during the
2007-2008 price spike. Natural gas experienced much larger price volatility compared
to the other three commodities in 2000-2001, 2005-2006, and again in 2011-2012.
Relating to the price behavior in Figure 1, it can be seen that large run-ups and
subsequent dramatic drops occurred to natural gas prices in the first two episodes,
while in the last episode an opposite pattern was observed. Ammonia prices
demonstrated relatively low volatility in the beginning of the sample, followed by
spikes in 2000-2003, 2007-2008, and again in 2011 and 2013, though of much smaller
magnitudes. For corn, it appears that with the exception of 1997-2001 when prices are
characterized with low volatility, the coefficient of variation has largely followed a
boom-and-bust cycle in the remaining years.
We next examine the stationarity property of the three data series using the Augmented
Dickey-Fuller (ADF) and Phillips-Perron tests both with and without a time trend.

Natural Gas
0.45

0.35

0.25

0.15

0.05
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Year

Ammonia
0.5
0.4
0.3
0.2
0.1
0.0
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Year

Corn
0.30
0.25
0.20
Figure 2.
Coefficient of 0.15
variation for natural 0.10
gas, ammonia, and 0.05
corn prices 0.00
(1994-2014) 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Year
The lag length of the ADF test is selected using the Akaike information criterion (AIC). All Price and
prices are converted to logarithmic levels. Regardless of the testing procedure used or the volatility
model specified, we fail to reject the null hypothesis of nonstationarity at the 5 percent
significance level for any of the three log price series. By contrast, their first differences –
transmissions
price returns – are all stationary at the 5 percent significance level.
Following the unit root test results, we consider the descriptive statistics of price
returns, multiplied by 100, for each of the three commodities, as shown in Table I. As it 159
appears, ammonia on average exhibits highest returns during the sample period, while
natural gas and corn markets have very comparable average returns. However, returns
in the natural gas market appear to be much more volatile than either corn or ammonia,
a result consistent with the pattern in Figure 2. All return series appear to be non-
normally distributed and demonstrate a leptokurtic distribution, as indicated by the
significant Jaque-Bera test results and excess kurtosis. Panels (b) and (c) of Table I
present the autocorrelation coefficients of the four return series and squared returns, as
well as the Ljung-Box (LB) test statistics. The null hypothesis of no autocorrelation is
rejected for both returns and squared returns, indicating the possible presence of
nonlinear structure in the returns.
The last step in the preliminary analysis is to investigate the cointegrating
relationship between variables. We use the Johansen maximum likelihood procedure to
determine whether there exists cointegrating relationships between the three markets.
Results are presented in Table II. The lag length is selected using AIC with a maximum
lag of 26 weeks (six months)[5]. Estimation results suggest that we reject the null

Natural gas Ammonia Corn

Panel (a): summary statistics

No. of obs. 1,093 1,093 1,093
Mean 0.03 0.13 0.03
SD 7.36 3.47 4.16
Min −31.79 −27.44 −40.34
Max 38.21 28.03 16.37
Skewness 0.22*** −0.06 −1.34***
Excess kurtosis 2.02*** 16.94*** 13.73***
Jarque-Bera 194.59*** 13,073.97*** 8,914.38***
Panel (b): return correlation coefficients
AC (1) −0.080*** 0.073*** 0.021
AC (2) 0.062** 0.157*** 0.007
Ljung-Box (6) 24.83*** 62.28*** 3.46
Ljung-Box (12) 35.58*** 81.63*** 24.67**
Panel (c): squared return correlations
AC (1) 0.231*** 0.073*** 0.055**
AC (2) 0.108*** 0.122*** 0.016
Ljung-Box (6) 148.53*** 25.92*** 5.55
Ljung-Box (12) 153.86*** 35.35*** 7.47
Panel (d): unit root test results Table I.
ADF −11.51*** −14.98*** −32.35*** Descriptive statistics
PP −35.80*** −31.40*** −32.37*** of natural gas,
Notes: ADF, Augmented Dickey-Fuller; PP, Phillips-Perron tests; AC, autocorrelation coefficient. Returns ammonia, and corn
are calculated as log ( pt/pt−1) × 100. **,***Statistically significant at 5 and 1 percent level, respectively returns (1994-2014)
AFR hypothesis of no cointegrating vector between the three price series at the 1 percent
76,1 significance level. However, we fail to reject the null hypothesis that there exists at
most one cointegrating vector for the three prices at either 5 or 1 percent significance
levels. Results from the cointegration test suggest that it is necessary to account for this
long-run relationship in the mean equation, and that a VECM model is preferred over a
vector autoregression model.
160
Estimation results
This section presents the estimation results from the VECM-MGARCH model that
examines the level of interdependence and volatility transmission between natural
gas, ammonia, and corn markets. Based on AIC, two lags are used in the VECM
model. Results for both conditional mean and volatility equations are presented in
Table III, with model adequacy testing results presented at the bottom of the
table (panel (d)). We tested for autocorrelation in residuals using multivariate LB
portmanteau test of Hosking (1981), and fail to reject the null hypothesis of no
autocorrelation at various lags. No ARCH effects are found at various lags using
the Lagrange multiplier test as described in Hacker and Hatemi-J (2005).
The conditional covariance matrix is found to be stationary as all eigenvalues lie
within the unit circle. In addition, we reject the null hypothesis that all parameters in
matrices A and B are jointly 0, supporting the use of MGARCH model to account for
time-varying volatility.
Turning first to panel (a) of Table III that presents the estimated error correction
term, our regression results suggest that there exists one cointegrating vector between
the three price series, and that ammonia price is positively correlated with both natural
gas and corn prices in the long-run. These positive relationships should not be
surprising given that higher natural gas price increases ammonia production costs,
while higher corn prices poses upward demand pressure on ammonia as farmers have
the incentive to achieve maximum yield by increasing fertilizer application. Since all
prices are in the logarithmic format, the estimated parameters in the long-run parity
indicate the elasticity of price response between different commodities. The significant
role played by natural gas in ammonia price formation in the long-run is evident given
that 1 percent increase in natural gas price will result in 0.6 percent increase of
ammonia price. However, it appears that demand plays even a bigger role in ammonia
prices in the long-run as the elasticity of price response between ammonia and corn
markets is very close to 1.
Panel (b) of Table III indicates the short-run dynamics between the three price
series. The estimated coefficient of the error correction term shows the speed at which
each price series adjusts to deviations from the long-run equilibrium as defined by the

Maximum rank (K) Log-likelihood Eigenvalue Trace statistic 5% critical value 1% critical value
Table II.
Johansen maximum 0 5,381.50 45.15 29.68 35.65
likelihood test of 1 5,399.30 0.03 9.55 15.41 20.04
cointegrating 2 5,403.02 0.01 2.13 3.76 6.65
relationship between 3 5,404.08 0.00
natural gas, Notes: The null hypothesis for each row is that there is a maximum of K cointegrating vector between
ammonia, and corn the three prices (measured in logrithimic format). Rejection of the null hypothesis occurs when the trace
prices (1994-2014) statsitic exceeds the critical value
Panel (a): error correction term:
Price and
ECT t ¼ 2:505nnn pðN GÞt 4:223nnn pðAmmoniaÞt þ 4:308nnn pðCornÞt þ16:286 volatility
P transmissions
Panel (b): vector error correction model: DP t ¼ pj¼1 bj DP tj þ aECT t1 þ et ;
Natural gas Ammonia Corn
Δp(NG)t−1 −0.067 (0.030)* 0.028 (0.012)** 0.012 (0.016)
Δp(NG)t−2 0.069 (0.030)** 0.019 (0.013) 0.011 (0.015)
Δp(Ammonia)t−1 −0.043 (0.059) 0.159 (0.033)*** −0.011 (0.036) 161
Δp(Ammonia)t−2 0.087 (0.055) 0.179 (0.032)*** −0.054 (0.032)*
Δp(Corn)t−1 0.132 (0.052)** −0.026 (0.022) 0.022 (0.029)
Δp(Corn)t−2 0.036 (0.050) −0.006 (0.024) 0.037 (0.027)
ECTt−1 −0.334 (0.204) 0.326 (0.089)*** −0.401 (0.106)***
Panel (c): multivariate generalized autoregressive heteroskedasticity model:
H t ¼ C 0 C þA0 et1 e0t1 AþB0 H t1 B;
Element (row no., column i) Natural gas (i ¼ 1) Ammonia (i ¼ 2) Corn (i ¼ 1)
c1i 3.613 (0.504)***
c2i −0.131 (0.197) 0.642 (0.202)***
c3i −0.084 (0.300) −1.130 (0.209)*** 0.000 (0.591)
a1i 0.338 (0.044)*** 0.029 (0.016)* 0.055 (0.017)***
a2i 0.047 (0.062) 0.300 (0.028)*** 0.093 (0.033)***
a3i −0.071 (0.058) −0.032 (0.024) 0.344 (0.027)***
b1i 0.800 (0.051)*** −0.016 (0.017) 0.015 (0.022)
b2i 0.032 (0.063) 0.839 (0.021)*** −0.438 (0.026)***
b3i 0.020 (0.051) 0.312 (0.016)*** 0.827 (0.024)***
F test aij ¼ bij ¼ 0 ¼ 0,∀i ≠ j 0.758 130.07*** 90.68***
Panel (d): model adequacy test
Natural gas Ammonia Corn
Eigenvalues from BEKK (0.935, 0.000) (0.654, −0.579) (0.654, 0.579)
(0.774, −0.273) (0.774, 0.273) (0.763, 0.000)
Hosking (1981) multivariate autocorrelation test of residuals (lag ¼ 4): test stat ¼ 35.34, p ¼ 0.50
Hosking (1981) multivariate autocorrelation test of residuals (lag ¼ 6): test stat ¼ 49.56, p ¼ 0.65
LM test for multivariate ARCH (lag ¼ 1): test stat ¼ 30.09 p ¼ 0.75
LM test for multivariate ARCH (lag ¼ 2): test stat ¼ 58.97 p ¼ 0.86
Wald test for the null that parameters in matrices A and B are jointly 0: test stat ¼ 1,182.97 p ¼ 0.00 Table III.
Notes: Prices are measured in logrithimic format. aij and bij represent the direct impact of lagged volatility VECM-MGARCH
and shocks originated in market i affect the conditional volatility in market j, respectively. Standard model estimation
deviation in parentheses. *,**,***Statistically significant at 10, 5, and 1 percent level, respectively results (1994-2014)

cointegrating vector in panel (a). Strong statistical significance is found for the
adjustment parameters associated with ammonia and corn, but not natural gas.
The lack of response in natural gas prices to the long-run equilibrium suggests that
natural gas leads price changes in this three-commodity system and that ammonia
and corn prices are the ones making adjustments to the disequilibrium. Such a
relationship reflects the fact that natural gas is a much larger market and that the
agricultural usage of natural gas, both directly as fuel and indirectly through
ammonia, only accounts for a rather small portion of total natural gas use. Further, it
appears that corn prices adjust slightly faster to the long-run equilibrium than
ammonia prices. In responding to the disequilibrium in the long-run parity, corn
prices adjust at a speed of 40 percent each week until the system returns to the
equilibrium, while for ammonia that ratio is 32 percent.
AFR Short-run interdependences of three return series are shown in the remaining rows
76,1 of panel (b). As can be seen, natural gas price returns are significantly affected by their
own lags and lagged returns in the corn market, but not by lagged returns in the
ammonia market. Given that natural gas is the main input for ammonia production, it
should not be surprising that ammonia price returns are significantly and positively
affected by lagged returns in natural gas market in the short run. The positive impact
162 of corn prices may reflect some common impacts from macroeconomic factors not
captured by the model. However, demand pressures from the corn market fail to exert a
significant impact on ammonia price, a conclusion opposite to what is found for the
long-run case. Additionally, we find that short-run returns of corn are not affected by
returns in natural gas market, and are only slightly negatively affected by returns in
the ammonia market. To the extent that corn production is relatively fixed for a given
marketing year, this lack of response in corn prices is likely to reflect the difficulty
in adjusting corn production to account for natural gas and fertilizer price
changes, especially at the weekly horizon. It may also be that demand disruptions
(e.g. ethanol production) play a dominant role in driving short-run corn price
movements (see Du et al., 2011; Mallory et al., 2012).
Panel (c) of Table III presents the MGARCH estimation results. Turning first to the
diagonal elements in matrix A that measure the own-volatility persistence and matrix
B that measure how shocks originated in one market affects its own conditional
volatility, it can be seen that the conditional volatility of all three commodities are
highly dependent on its own lagged volatility (bii ≠ 0), with the estimated coefficient
ranging from 0.80 for natural gas to 0.84 for ammonia. Further, there is strong
own-volatility spillover in all three markets as the diagonal terms in the matrix A are all
significant (aii ≠ 0). The magnitude of the own-volatility spillover effect appears to be
the largest for corn and follows natural gas, though the difference is small.
Turning next to the cross-market volatility dynamics, caution should be taken to
interpret the results. Given the BEKK formulation in Equation (2), off-diagonal
elements in matrix B measure the direct persistence of volatility, i.e., how lagged
volatility in one market affects the volatility in another market, and off-diagonal
elements in matrix A measure how lagged innovation originated from one market
directly affects the volatility in another markets. However, there also exists indirect
impacts through other covariance terms such that the conditional volatility in each
market is affected by all other off-diagonal terms as well.
Results in panel (c) of Table III suggest that there are direct lagged volatility
interactions between corn and ammonia prices, in that both b23 and b32 terms are
statistically significant. Natural gas appears to behave independently from the other
two markets. The conditional price volatility of natural gas is not only unaffected by
the lagged volatility in the other two markets, but also fails to explain either corn or
ammonia volatility. Additionally, lagged innovations in the ammonia market appear to
significantly and positively affect the volatility of corn prices (a23 ≠ 0). However,
the reverse spillover from corn to fertilizer is not observed (a32 ¼ 0). We also find that
shocks originating from natural gas prices can cause significant instability in both
fertilizer and corn markets, a relationship consistent with the findings in the long-run
price relationship.
We also consider VIRFs, as they trace the response of volatility in each market to a
shock originated from another market. Following Gardebroek and Hernandez (2013) we
generate the VIRFs to a shock originated in another market that increases its
conditional volatility by 1 percent. Impulse responses plotted in Figure 3 corroborate
 1
Response to natural gas shock Price and
volatility
0.8
transmissions
Percent

0.6

0.4

0.2
163
0
0 5 10 15 20 25 30 35 40 45 50 55

Response to ammonia shock

1

0.8
Percent

0.6

0.4

0.2

0
0 5 10 15 20 25 30 35 40 45 50 55

Response to corn shock

1

0.8
Figure 3.
Percent

0.6
Volatility impulse
0.4 response function
0.2 for a shock that
generates one
0 percent increase
0 5 10 15 20 25 30 35 40 45 50 55 60
in volatility in
Weeks each market
Natural Gas Ammonia Corn

our discussion above. Shocks generated in the corn market have large and persistent
impacts on ammonia volatility, with the maximum magnitude being 0.74 percent (week 3)
and the impact lasting into week 30. The response of corn volatility to shocks from the
ammonia market is also evident, though with a much smaller magnitude (the maximum
impact of 0.3 percent is reached at week 4). Both corn and ammonia volatility also
respond to shocks from the natural gas market, with the maximum magnitude being 0.14
percent and the effects lasting into week 10. By contrast, natural gas volatility does not
respond to shocks from either corn or ammonia markets.
Our results from the VECM-MGARCH model highlight the important role fertilizer
plays on both the price of corn and its volatility, an area of research that has yet to
receive much attention in the literature. We find that corn and fertilizer prices interact
in both the conditional mean and conditional volatility equations, a result in general
consistent with the findings in Ott (2012). However, contrary to Ott (2012), who shows
that food prices have been driving fertilizer prices but not vice versa, we find that both
prices respond significantly to any deviations from the long-run parity, and that in the
short run, ammonia prices are primary driven by natural gas prices as well its own
AFR lagged prices. The disparity between the results of our study and Ott (2012) could be
76,1 due to a number of factors. A much longer sample period (1960-2012) is considered in
Ott (2012), and the short-run effect of commodity prices on fertilizer prices could be due
to the fact that fertilizer markets were less concentrated in the earlier part of the
sample. Ott (2012) uses a food price index rather than the price of a specific commodity,
and a fertilizer price index constructed based on urea, potassium, and phosphate
164 instead of the price of a single fertilizer. As such, the results found in Ott (2012) may not
apply to the relationship between corn and ammonia prices. On the volatility level,
Ott (2012) finds that food and fertilizer volatility move closely when the energy cost is
rising but not when it is declining. Our study does not attempt to answer such a
question. Instead, we show that lagged volatility in fertilizer market affect the
conditional volatility in corn market and vice versa. However, only shocks originating
from the ammonia market significantly impact corn price volatility, while the converse
is not true for the period 1994-2014.

Robustness checks
In this section, we consider two robustness checks for our estimation results, i.e., using
oil prices as a proxy for the production cost of fertilizer and considering a one-time
structural break for the shale boom. Results from these robustness checks can be found
in the online Appendix.

Using oil prices to account for fertilizer transportation cost

Fertilizer prices in the USA could be highly influenced by transportation costs. Due
to plant closures that took place prior to 2008, current nitrogen fertilizer production
in the USA has been unable to meet growing demand. USA is the world’s largest
importer of nitrogen fertilizer, with net imports accounting for roughly 50 percent of
domestic consumption in 2011. Fertilizers are heavy, bulky commodities that require
substantial resource and coordination during the transportation process. As such, the
cost of transportation plays a large role in fertilizer prices. The cost to transport
ammonia can be even higher as it is a hazardous material requiring special handling.
For instance, shipping cost accounts for 22 percent of the cost of ammonia shipped
from the Caribbean to the USA, and for ammonia imported from Russia this ratio is
above 50 percent (Huang, 2009). High transportation costs also imply that fertilizer
prices can differ significantly depending on local supply demand conditions
(Erickson and Miller, 2009).
We consider how the price of crude oil affects the transportation costs associated
with importing ammonia to the USA from overseas. Because of the complexity
involved in estimating high-dimensional MGARCH models, we only consider a
trivariate model that includes crude oil, fertilizer, and corn prices. Results from this
model resemble the figures found in the natural gas, fertilizer, corn system. As in the
case of natural gas, the conditional variance of crude oil is affected by own shocks and
lagged volatility with no volatility spillovers originated from the fertilizer and corn
markets. The patterns of conditional variance of fertilizer and corn are robust to the
specification of using crude oil as an alternative to natural gas in the system. Own
shocks and lagged volatility explain the bulk of the variance, but spillovers are also
found between fertilizer and corn, with lagged volatility runs in both directions.
Meanwhile shocks in fertilizer prices help to explain the conditional variance of corn,
but not the opposite. On the other hand, we find that crude oil volatility influences the
variance of fertilizer and corn to a larger extent than natural gas. For the conditional Price and
mean equation, we find ammonia prices to be positively correlated to oil and corn prices volatility
in the long-run, and that ammonia prices adjust significantly to disequilibrium from the
long-run parity. Corn and crude oil prices, however, do not respond to such deviations.
transmissions

Accounting for a one-time structural break

The natural gas market has evolved significantly since 2007 with the popularization of 165
the combined use of horizontal drilling and hydraulic fracturing techniques. This
triggered a major increase in the US natural gas production. In 2006 shale production
represented less than 5 percent of US dry natural gas production, while in 2013 this ratio
jumped to 47 percent[6]. The increased shale gas production has kept natural gas price
relatively low and stable, fluctuating between $2 and $6/mmBTU during 2009-2014, less
than 50 percent of the peak in mid-2005. The abundance of natural gas and consequently
low prices has the potential to make fertilizer production in the USA more profitable than
before, attracting not only domestic producers to expand production capacity but also
foreign companies to move production facilities to the USA[7]. The increased production
is likely to result in lower fertilizer prices in the USA[8]. However, as pointed out by
Ruder and Bennion (2013), domestic fertilizer producers have not taken full advantage of
the lower natural gas prices due to production capacity constraints. The implication is
that lower fertilizer prices may not occur in the short run.
Given the possible change in the price and volatility interplays between natural gas
and ammonia markets, we re-estimate the VECM-GARCH model for natural gas,
ammonia, and corn prices for 2006-2014. Findings from this period corroborate the
argument made in Ruder and Bennion (2013) – the structural change experienced in
the natural gas industry has in fact decreased the linkage between natural gas and the
other two markets. Only a mild transmission on price levels is found from natural gas
to fertilizer, but not to corn. Also, the volatility of natural gas prices does not help to
explain fertilizer or corn conditional variance. Despite the lack of integration of natural
gas during that period, transmission between fertilizer and corn remains strong.
Fertilizer and corn prices adjust significantly to disequilibrium from long-run parity,
while natural gas prices do not respond to such deviations. Price transmission in the
short run between fertilizer and corn goes on both directions, but it is stronger from
corn to fertilizer. The same pattern is observed in volatility, where lagged volatility
runs on both directions, however, in terms of shocks, only fertilizer’s variance can be
explained by shocks in the corn markets, but not the opposite.
All in all, the relationship between fertilizer and corn is robust to different
specifications, with a strong linkage between those markets. There is a mild volatility
transmission from natural gas to the other two markets during the 1994-2014 period.
Crude oil and natural gas exhibit similar patterns, although it appears that a stronger
linkage exists between crude oil and corn. On the other hand natural gas prices seem to
disconnect to the other markets after 2006, reflecting the inability of fertilizer producers
to reap profits from the recent shale boom due to production capacity constraints in the
short run.

Conclusions
We investigate the price and volatility transmission between natural gas, fertilizer
(ammonia), and corn markets, an issue that has been traditionally ignored in the
literature despite its significant importance. Using a VECM for the conditional mean
AFR equation and MGARCH model for the conditional volatility, we find significant
76,1 interplay between fertilizer and corn markets, while only a mild linkage in prices and
volatility exists between those markets and natural gas during the period 1994-2014.
Specifically, there is not only a positive relationship between ammonia and corn prices
in the short run, but both prices react to deviation from the long-run parity.
Furthermore, the lagged conditional volatility of ammonia prices positively affects
166 conditional volatility in the corn market and vice versa. This result is robust to a
specification using crude oil price as an alternative to natural gas price.
We also investigate these relationships during 2006-2014, a period of strong
volatility in corn prices. Also during this period we witnessed the emergence of shale
gas, which led to an increasing production of natural gas in the USA that kept natural
gas prices at relatively low levels. Results indicate virtually no linkage between
natural gas prices and those of fertilizer and corn during that period, while linkages in
price level and volatility between the latter remain strong.
As Ruder and Bennion (2013) suggest, there are many possible explanations for
these results. Domestic fertilizer producers may have not been able to take advantage
of low natural gas prices because of production capacity constraints. Also, results from
Hernandez and Torero (2013) suggest that a high level of market concentration exists in
the global fertilizer industry. This may imply an asymmetric price transmission based
on market power, where lower input prices are not entirely transmitted to the following
stages of the supply chain, helping to explain why even on the presence of low natural
gas prices, fertilizer prices did not react much.
Further, we observed during the period 2006-2014 that the level and volatility
transmission were stronger on the direction from corn to fertilizer, although there is
evidence of running in both directions. Results for this period concur with those of Ott
(2012), who argues that fertilizer prices are mainly driven by demand shocks. It is
important to point that this finding does not hold when we consider the period
1994-2014. This suggests that market dynamics can rapidly change, and as a result the
levels of interdependence between related products in the supply chain.
If market power in the fertilizer industry hinders price transmission, then as
advocated by Hernandez and Torero (2013), the implementation of actions that promote
competition in the industry through providing information to market agents, and
encouraging cooperation among antitrust institutions would be beneficial, particularly
in the scenario of low natural gas prices. Energy and grain price volatility remains
high, with crude oil price declining from US$100 per barrel in 2014 to less than US$50 in
2015, and corn prices plummeting. Low energy prices affect investments on shale gas,
making some production sites unprofitable, which in turn can affect the long-run
dynamics of natural gas production in the USA. The asymmetric price transmission
from natural gas to fertilizer prices due to market power could have detrimental effects
to all three industries considered in this study. As a result, we conclude an ongoing
analysis of the industry is warranted.
Results in this study have broader welfare implications beyond the corn, fertilizer,
and natural gas industries. Since the USA accounts for 40 percent of global grain
exports, increase in production cost due to higher fertilizer prices could be quickly
passed into global food prices, exacerbating poverty issues in developing countries that
are often heavily dependent on agricultural commodities (Ivanic and Martin, 2008;
Zezza et al., 2008). While food security appears to increase (decrease) following
increasing food prices in rural (urban) areas, the very poor nearly always see negative
effects (Dawe and Slayton, 2010). Even when the average food price remains the same,
the effects of periods of high prices can cause effects that are not mitigated by periods Price and
of low prices. Similarly, low prices can also cause temporary income loss from volatility
agricultural producers, which are not equaled by price increases of similar magnitudes
(von Braun and Tadesse, 2012). Our results highlighting the link between the fertilizer
transmissions
and corn markets on both price levels and volatility suggest that changing fertilizer
prices should be evaluated when analyzing the causes of volatile commodity prices and
its associated welfare impacts, two issues that continue to generate much debates 167
among academic researchers.

Notes
1. See www.worldbank.org/en/research/commodity-markets (accessed October 26, 2015).
2. We define “long-run” and “short-run” in the context of cointegration. If two variables are
cointegrated we expect them to share a long-run relationship, where the variables move in
similar fashion and direction. As described below, in the vector error correction model this is
captured by the error correction term. Meanwhile, short-run relationships between the
variables are captured by the coefficients of the lagged variables.
3. See www.ers.usda.gov/data-products/fertilizer-use-and-price.aspx for data on fertilizer usage.
4. www.pioneer.com/home/site/us/agronomy/common-n-fert-and-stabilizers/ (accessed October
26, 2015).
5. An equal number of lags is imposed for each of the three variables included in the model.
6. See www.eia.gov/petroleum/production/ (accessed October 26, 2015).
7. See www.washingtonpost.com/business/economy/the-new-boom-shale-gas-fueling-an-
american-industrial-revival/2012/11/14/73e5bb8e-fcf9-11e1-b153-218509a954e1_story.html
(accessed October 26, 2015).
8. https://rbnenergy.com/fertile-prospects-for-natural-gas%E2%80%93can-ammonia-soak-up-
bakken-gas-surplus (accessed October 26, 2015).

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(The Appendix follows overleaf.)

AFR Appendix. Additional tables
76,1

Panel (a): error correction

 term:
    
ECT t ¼ 3:055 log P ðOil Þt 5:209 log P ðAmmoniaÞt þ 1:677 log P ðCornÞt þ 17:110
P
170 Panel (b): vector error correction model: DP t ¼ pj¼1 bj DP tj þaECT t1 þ et ;
Crude oil Ammonia Corn
ΔP(Oil)t−1 −0.054 (0.028)* 0.012 (0.019) −0.044 (0.024)*
ΔP(Oil)t−2 0.001 (0.027) −0.006 (0.020) −0.071 (0.022)***
ΔP(Ammonia)t−1 −0.019 (0.039) 0.158 (0.034)*** −0.027 (0.035)
ΔP(Ammonia)t−2 0.064 (0.036)* 0.140 (0.031)*** −0.042 (0.032)
ΔP(Corn)t−1 0.028 (0.034) −0.022 (0.023) 0.017 (0.029)
ΔP(Corn)t−2 0.044 (0.031) −0.011 (0.023) 0.033 (0.027)
ECTt−1 0.061 (0.131) 0.365 (0.092)*** −0.127 (0.097)
Panel (c): multivariate generalized autoregressive heteroskedasticity model:
H t ¼ C 0 C þ A0 et1 e0t1 Aþ B0 H t1 B;
Element (row no., column i) Crude oil Ammonia Corn
C1i 0.764 (0.182)***
C2i −0.059 (0.502) 0.623 (0.321)*
C3i 1.091 (0.739) −1.120 (0.565)** 0.000 (0.686)
a1i 0.190 (0.027)*** 0.010 (0.022) 0.119 (0.028)***
a2i 0.018 (0.043) 0.312 (0.034)*** 0.026 (0.036)
a3i 0.019 (0.031) −0.037 (0.025) 0.351 (0.035)***
b1i 0.963 (0.007)*** −0.056 (0.022)** −0.025 (0.024)
b2i 0.061 (0.038) 0.847 (0.029)*** −0.351 (0.030)***
b3i 0.011 (0.033) 0.311 (0.020)*** 0.802 (0.037)***
aij ¼ 0, bij ¼ 0, ∀i ≠ j
Panel (d): model adequacy test
Crude oil Ammonia Corn
Eigenvalues from BEKK 0.960 0.864 0.864
0.900 0.674 0.674
Hosking (1981) multivariate autocorrelation test of residuals (lag ¼ 4): 0.556
Hosking (1981) multivariate autocorrelation test of residuals (lag ¼ 6): 0.570
LM test for multivariate ARCH (lag ¼ 1): 0.955
Table AI. LM test for multivariate ARCH (lag ¼ 2): 0.960
VECM-MGARCH Notes: aij and bij represent the direct impact of lagged volatility and shocks originated in market i
model estimation affects the conditional volatility in market j, respectively. Standard deviation in parentheses.
results with crude oil *,**,***Statistical significant at 10, 5, and 1 percent level, respectively
Panel (a): error correction term:
Price and
     
ECT t ¼ 3:055 log P ðN aturalGasÞt 5:209 log P ðAmmoniaÞt þ 1:677 log P ðCornÞt þ 17:110 volatility
P
Panel (b): vector error correction model: DP t ¼ pj¼1 bj DP tj þ aECT t1 þet ; transmissions
Natural gas Ammonia Corn
ΔP(Natural Gas)t−1 −0.073 (0.043)* 0.020 (0.026) 0.015 (0.038)
ΔP(Natural Gas)t−2 0.039 (0.042) 0.012 (0.025) −0.008 (0.033)
ΔP(Natural Gas)t−3 −0.032 (0.044) −0.028 (0.026) −0.003 (0.033) 171
ΔP(Natural Gas)t−4 −0.051 (0.045) −0.062 (0.026)** 0.006 (0.035)
ΔP(Natural Gas)t−5 −0.087 (0.050)* −0.003 (0.020) −0.016 (0.033)
ΔP(Ammonia)t−1 −0.113 (0.078) 0.067 (0.048) −0.027 (0.053)
ΔP(Ammonia)t−2 0.082 (0.068) 0.246 (0.049)*** 0.086 (0.042)**
ΔP(Ammonia)t−3 0.010 (0.069) 0.081 (0.045)* −0.144 (0.060)**
ΔP(Ammonia)t−4 0.057 (0.069) 0.011 (0.047) −0.014 (0.052)
ΔP(Ammonia)t−5 −0.020 (0.064) −0.001 (0.049) 0.218 (0.074)***
ΔP(Corn)t−1 0.127 (0.063)*** 0.018 (0.029) 0.037 (0.054)
ΔP(Corn)t−2 0.050 (0.072) −0.014 (0.034) −0.057 (0.054)
ΔP(Corn)t−3 −0.074 (0.061) 0.000 (0.038) 0.009 (0.047)
ΔP(Corn)t−4 −0.037 (0.077) 0.115 (0.040)*** 0.011 (0.052)
ΔP(Corn)t−5 −0.004 (0.062) 0.062 (0.034)* 0.030 (0.053)
ECTt−1 0.256 (0.261) 0.482 (0.146)*** −0.431 (0.175)***
Panel (c): multivariate generalized autoregressive heteroskedasticity model:
H t ¼ C 0 C þ A0 et1 e0t1 Aþ B0 H t1 B,
Element (row no., column i) Crude oil (i ¼ 1) Ammonia (i ¼ 2) Corn (i ¼ 3)
C1i 0.764 (0.182)***
C2i −0.059 (0.502) 0.623 (0.321)*
C3i 1.091 (0.739) −1.120 (0.565)** 0.000 (0.686)
a1i 0.190 (0.027)*** 0.010 (0.022) 0.119 (0.028)***
a2i 0.018 (0.043) 0.312 (0.034)*** 0.026 (0.036)
a3i 0.019 (0.031) −0.037 (0.025) 0.351 (0.035)***
b1i 0.963 (0.007)*** −0.056 (0.022)** −0.025 (0.024)
b2i 0.061 (0.038) 0.847 (0.029)*** −0.351 (0.030)***
b3i 0.011 (0.033) 0.311 (0.020)*** 0.802 (0.037)***
Panel (d) Model Adequacy Test
Crude oil Ammonia Corn
Eigenvalues from BEKK 0.923 0.802 0.560
0.560 0.640 0.640
Hosking (1981) multivariate autocorrelation test of residuals (lag ¼ 4): 0.292
Hosking (1981) multivariate autocorrelation test of residuals (lag ¼ 6): 0.090
LM test for multivariate ARCH (lag ¼ 1): 0.955 Table AII.
LM test for multivariate ARCH (lag ¼ 2): 0.960 VECM-MGARCH
Notes: aij and bij represent the direct impact of lagged volatility and shocks originated in market i affects model estimation
the conditional volatility in market j, respectively. Standard deviation in parentheses. *,**,***Statistically results with natural
significant at 10, 5, and 1 percent level, respectively gas (2006-2014)

About the authors

Xiaoli Liao Etienne is an Assistant Professor in the Division of Resource Management, West
Virginia University. Xiaoli Liao Etienne is the corresponding author and can be contacted at:
xletienne@mail.wvu.edu
Andrés Trujillo-Barrera is an Assistant Professor in the Marketing and Consumer Behaviour
Group, Wageningen University.
Seth Wiggins is a PhD Candidate in the Division of Resource Management.

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