The Volatility of Sugar and Ethanol Prices: A Tale of Two Markets Using Wavelet Analysis

Abstract

This study ventures into the dynamic and interconnected realms of sugar and ethanol prices, unveiling their volatility patterns using the powerful tool of wavelet analysis. The first part of the study establishes a link between Brazil's sugar price surge and significant economic events, including the National Alcohol Program (Proálcool), the military dictatorship, and the implementation of the Real Plan. The second part zooms out to global factors, such as concerns about the greenhouse effect, flex-fuel engine technology, and recent challenges like droughts and COVID-19. The analysis uncovers distinct patterns in the volatility of sugar and ethanol prices. Factors like global supply and demand, climate-induced crop variations, and government policies influence sugar prices. In contrast, ethanol prices are more directly influenced by energy market dynamics, particularly crude oil prices, due to its role as a biofuel component. Furthermore, the study reveals time-frequency correlations between these two markets, shedding light on moments of synchronization and divergence. In this narrative of the two markets, wavelet analysis emerges as a powerful tool for deciphering past volatility and predicting future trends. It allows both estimating the degree of correlation and verifying the unfolding of these relationships over time. The findings of this study contribute as a bridge between theory and practice for decision-making, such as resource allocation and risk management in a constantly evolving economic scenario, highlighting the importance of analysis in this context.